[Congressional Record (Bound Edition), Volume 145 (1999), Part 11]
[Senate]
[Pages 15625-15627]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       ECONOMIC REFORMS IN RUSSIA

  Mr. KERREY. Mr. President, I draw my colleagues' attention to an 
article that appeared earlier this year in Economic Reform Today. I ask 
unanimous consent that the full text of ``Safeguarding Russian 
Investors: Securities Chief Speaks Out'' be printed at the end of my 
statement.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. KERREY. Mr. President, Economic Reform Today is a quarterly 
magazine published by the Center for International Private Investment. 
CIPE is one of the core grantees of the National Endowment for 
Democracy and is dedicated to promoting democratic governance and 
market oriented economic reform. Their work has been particularly 
important in assisting the ongoing transition to free markets in the 
former communist countries of Eastern Europe and the former Soviet 
Union.
  The article I will include in the Record, highlights Russia's 
continuing effort to implement political and economic reforms. This has 
been a painful process in Russia. However, it is my firm belief that 
Russia's transition to a free-market democracy will be measured in 
decades, not years. During this important time--CIPE and the other NED 
grantees--have been working to ensure that the Russian people have 
access to the information and resources necessary to make a successful 
transition.
  Again, I encourage my colleagues to read this important article.

                               Exhibit 1

      Safeguarding Russian Investors: Securities Chief Speaks Out

(If Russia is to gain economic stability and attract foreign investors 
it will need to respond better to the needs and concerns of investors. 
    Dmitry Vasiliyev has made this the chief reform priority of the 
securities commission that he heads. He is one of the strongest voices 
 in Russia today calling for more efficient and transparent markets to 
   provide the necessary foreign and domestic capital to jump start 
Russia's newly privatized enterprises. In this interview with Economic 
  Reform Today, Vasiliyev underscores the importance of establishing 
    strong shareholders' rights as a cornerstone of economic reform)

       ERT: You have made upholding shareholder rights one of the 
     top priorities of the Federal Securities Commission (FSC). 
     Why is this so important?
       Mr. Vasiliyev: Protecting investors' rights is an important 
     prerequisite for attracting foreign investment, and, 
     unfortunately, Russia faces serious problems in this area. 
     Although we are gradually improving the quality of corporate 
     governance, Russia is losing billions of dollars in 
     investments because of poor investor safeguards, both in 
     corporate and government securities. This is reflected in the 
     lower value of Russian stock prices as compared with those of 
     other emerging market countries. Better protection of 
     investors' rights will attract more investors and allow 
     companies to raise more capital and lead to the development 
     of new technologies and more production.
       ERT: Can you gauge the damage that denying these 
     shareholder rights inflicts on the Russian economy?
       Mr. Vasiliyev: The Russian economy faces serious 
     consequences unless it can offer adequate safeguards. Not 
     only are foreigners reluctant to invest in Russia, but 
     Russians do not trust it either. People are putting their 
     savings into dollars because other forms of investment don't 
     offer enough protection.
       That's why we have concentrated our efforts on protecting 
     the market from low-quality securities. Last year we denied 
     registration to 2,600 issues; that is, we turned down 14% of 
     all submitted prospectuses. That means we prevented 2,600 
     possible violations of shareholder rights. Of course we

[[Page 15626]]

     also had to cancel some issues that were already registered; 
     for example, the well-publicized cases involving the largest 
     Russian oil companies, such as Sidanko and Sibneft. Last week 
     the Commission launched an investigation into the case of 
     Yukos. We are determined to use all measure necessary to 
     defend minority shareholders. In some cases the exchange or 
     brokers themselves violate shareholder rights through 
     manipulation. Our investigations have increased sevenfold in 
     the last two years. We recognize, however, that we are only 
     at the beginning of a long process.
       A responsible government should observe a strict financial 
     policy and minimize its borrowing, including issuing 
     government bonds. The crisis over the past year was also a 
     crisis of sovereign debt: the crash of the GKO (government 
     bond) pyramid caused tremendous losses to the real economy 
     and to the financial sector. As a result, the government is 
     developing twelve new laws aimed at protecting investors. In 
     March, Parliament adopted one of these laws, which protects 
     investors in the securities markets. We also need to improve 
     our joint stock company law in order to reduce share dilution 
     and asset stripping, as well as to allow shareholders to 
     dismiss management and stop asset theft. We also want to 
     change the criminal code and make nondisclosure to investors 
     and crime. I believe that we can learn from other countries' 
     experiences, including the United States, in this area.
       There are several typical violations of shareholder rights 
     in Russia. The first is share dilution, which we have been 
     trying to counter by denying issue registrations. The bill 
     approved in March also introduces stricter procedures that 
     should protect against share dilution.
       The second is nondisclosure or provision of false 
     information. We have begun to address this issue through the 
     same bill, which allows the FSC to fine issuers of securities 
     if they provide insufficient disclosure or misleading data. 
     For example, if a prospectus contains false information, 
     those who have signed it--the CEO, the auditor and the 
     independent appraiser--bear a subsidiary responsibility if 
     investors lost money because the information was false. Of 
     course this is only the first step; we still have to iron out 
     how to enforce the law and other procedural matters. In the 
     West, for instance, you have ``class action'' suits, but 
     courts do not hear such cases in Russia.
       Another typical violation is transfer pricing abuse; that 
     is, when commodities or securities are sold at artificial 
     prices between or among affiliated companies. Here, as in the 
     case of asset stripping, shareholders need to have stricter 
     control over the actions of management. The FSC is trying to 
     prevent the execution of large transactions without prior 
     shareholders' approval. While we do not always succeed, we 
     are trying to close this important loophole.
       The issue of share conversion between a holding company and 
     its subsidiaries is very serious. Shareholders of both the 
     holding company and the subsidiaries must insist on a fair 
     and independent appraisal of assets and establishment of a 
     fair conversion rate. Government officials cannot solve this 
     question; it's a matter for management and the shareholders 
     and points up the importance of appropriate procedures for 
     corporate decision making. For example, in some cases, such 
     as Lukoil's, the share conversion process went pretty 
     smoothly because Lukoil management took a balanced and well-
     conceived position. Other cases, such as Sibneft, resulted in 
     huge scandals. This is a long-term process and the FSC will 
     be focusing on this issue indefinitely.
       ERT: Financial industrial groups have a very strong 
     presence in the Russian economy. Experts argue that they need 
     to be reformed or regulated. In your view, what type of 
     regulation is necessary?
       Mr. Vasiliyev: The economic crisis last year delivered a 
     very serious blow to financial industrial groups (FIGs). It 
     destroyed many of them, and weakened many of the so-called 
     ``oligarchs,'' who were forced to sell off parts of their 
     empires. Yukos is just one example of the troubles facing 
     these groups.
       I believe that FIGs are not the most efficient way to 
     achieve economic development. Equity or investment financing 
     through the securities market and the banking system should 
     be kept--and regulated--as separate systems. The experiences 
     of other countries, including the US, show that heavy 
     investment in industry by banks and financial institutions 
     can have catastrophic consequences. Back in 1997, I was 
     already insisting that Russia needs banks to stay away from 
     risky speculative operations, not to hold stock in companies 
     and not to invest in industry. What we had in the August 1998 
     crisis was the collapse of the settlement system.
       At the same time we need investment banks involved in 
     corporate finance, but investors know that many Russian banks 
     are used for speculative operations not for settlement 
     purposes. Russia's President Yeltsin recently sent a message 
     to the Federation Council stating that the country needs both 
     ``settlement'' banks and ``investment'' banks. The fact that 
     President Yeltsin highlighted this critical issue is an 
     encouraging sign for the ailing banking sector.
       Creditors' rights also need to be protected. In Russia 
     creditors are not offered adequate protection. The banks say 
     that they need a controlling interest in a company in order 
     to be able to lend money to it. Creditors' rights should be 
     protected, but the solution to that is for banks not to 
     participate in a company's equity capital. If banks would 
     lend to companies rather than invest in government bonds, 
     they would not be so involved in speculation and not be so 
     dependent on getting controlling interest in companies.
       State involvement in the economy should be minimal, but 
     today it is still very high. Sweeping privatization is not 
     the most important objective; the goal should be to privatize 
     the land held by industrial companies so they can use it as 
     collateral for loans. The sooner this is done the better, but 
     this process has moved very slowly since 1994. In my opinion 
     this aspect of privatization is more important than 
     agricultural reform.
       ERT: Can you delineate the responsibilities of the FSC and 
     the Central Bank in regulating corporate transactions and 
     capital markets? In what areas should they cooperate and in 
     what areas should they have separate responsibilities?
       Mr. Vasiliyev: I believe that each has its own functions--
     the main objective of the Central Bank, just like in any 
     other country, is supporting the national currency. My task 
     at the FSC is to protect investors and regulate the 
     securities market.
       ERT: In your view, what is the Russian public's perception 
     of the local business community? If it is negative, how 
     should businesses work to revamp this perception?
       Mr. Vasiliyev: The attitude toward business people is not 
     very good. I believe that the country's private sector should 
     work on changing its tarnished image. It should be 
     prestigious to be involved in business and society should 
     appreciate that it has an important function. Changing the 
     poor image of business will, of course, take a long time. The 
     ideology of the old Soviet regime won't disappear overnight. 
     In Russia it is the younger generation that is leaning toward 
     capitalism.
       The private sector, of course, will play a key role in the 
     economy. It already plays an important role, but often in the 
     form of speculation and the ``shadow'' economy. The Russian 
     economy needs to move from the shadows to the daylight 
     through simplification of regulation and licensing. We need 
     to make it profitable to pay taxes. (See ERT No. 4, 1997 pp. 
     6-9 for a detailed discussion of how Russia's ``shadow'' 
     economy operates.)
       ERT: In Russia, much of the public perceives the 
     privatization process as unfair. How would the changes in 
     regulations that you have outlined in this interview improve 
     this process?
       Mr. Vasiliyev: We believe that the structure of ownership 
     will gradually change. Many companies that were privatized as 
     joint stock companies will probably leave the securities 
     market. They are not interested in remaining publicly traded. 
     We will probably have 500 to 1,000 publicly traded companies. 
     Most small shops or factories employing less than 100 persons 
     will gradually end up being privately owned or become closely 
     held companies, which is fine. The number of publicly traded 
     companies is declining in countries that went through mass 
     privatization. We see this happening in the Czech Republic 
     and it will eventually happen in Russia, too.
       There were two components of Russia's privatization 
     process. One was land privatization--the land ``under'' 
     companies--and the other was securities markets development 
     intended to rectify privatizations that were not done in a 
     very efficient manner. We were forced to implement 
     privatizations in the way we did. Other options then were not 
     politically or psychologically acceptable in our country. I 
     still believe this. But it is obvious that we encountered a 
     lot of insider influence and very limited transparency 
     because of the very fast pace of transition.
       When we were first starting to privatize, I worked in the 
     state property commission as a deputy to Mr. Anatoly Chubais, 
     its chairman, and I drafted many documents on privatization. 
     One of the main conditions we asked for was that companies 
     become open joint stock corporations so that stock could be 
     sold and bought. Now that there is a battle for control of 
     these companies and the advent of outside shareholders is 
     beginning to strengthen their positions, Russian companies 
     are changing bit by bit. The securities markets are helping 
     this transition.
       The use of a central depository as a privatization 
     mechanism has been adopted by many emerging market countries 
     and is accepted by all securities commissions. If we could 
     establish a central depository, we would be able to reduce 
     the number of registrars and eventually move toward not using 
     them at all. Later we could introduce centralized clearing 
     settlements. These will lower investors' costs and 
     significantly improve protection of their rights since they 
     would then be protected from registrar-related risks. The 
     attractiveness of the Russian market would benefit 
     significantly from the results. So my position was and is 
     that sooner or later this central depository will be created 
     in Russia.
       Right now our policy is that no single issuer can control 
     more than 20% of a registrar, and that registrars handle a 
     large

[[Page 15627]]

     number of issuers. They gradually are becoming more 
     independent. Our largest registrars handle 200 to 300 issuers 
     and millions of accounts so that they are no longer dependent 
     on a particular issuer.
       Of course, there are still registrars who are under the 
     strong influence of a single issuer--Yukos, for example. But 
     they are subject to strict control by the Commission. In the 
     past year, we checked up on three-fourths of all registrars 
     and have 125 of them left to check. Almost all of them are 
     checked once a year.
       ERT: More broadly, what lessons should policymakers in 
     other developing countries learn from Russia's ongoing 
     transition to a market-oriented economy?
       Mr. Vasiliyev: The first lesson is that emerging markets 
     cannot borrow the experience of Western countries. You cannot 
     just transfer their legislation to other countries. We are at 
     a different stage of development. The Russian economy and its 
     financial instruments are nearly a century behind those of 
     the US, for example, in terms of our legal base, the 
     capitalization of our institutions, and our familiarity with 
     how a market economy works.
       The Russian economy faces several key obstacles. First is a 
     lack of expertise among Russian managers. A typical manager 
     cannot write a reasonable plan for investors. A manager may 
     have a project and an investor may have cash to invest, but 
     without a decent plan, nothing will develop. Second, Russia 
     must simplify its taxation rules and reduce the tax burden. 
     Only then will we see real economic growth and more revenues. 
     Third, we must greatly simplify procedures for the control 
     and licensing of businesses. Starting up and/or liquidating a 
     business should be easy. This would enable us to reduce crime 
     and corruption and transfer part of the informal economy to 
     the formal sector.

                          ____________________