Re-Nationalization of Industry Continues

UNCLAS SECTION 01 OF 02 MINSK 001383

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TAGS: ECON EINV PGOV WTRO BO
SUBJECT: Re-Nationalization of Industry Continues

Ref: Minsk 955


1. (SBU) Summary: Reftel describes how the GOB has been using the
Golden Share to nationalize a number of companies. Over the summer
the GOB invoked the Golden Share to take temporary control of
several firms. The GOB then ordered these companies to issue large
numbers of severely undervalued shares and grant all the new shares
to the GOB, thereby gaining a majority stake in each. In the past
month the GOB has streamlined this process by getting several
companies to give a majority stake to the GOB without the Golden
Share being invoked. The GOB has taken control of several
companies in the past month through this mechanism. Even though
the GOB has found new means to further nationalize the economy
while avoiding the infamous Golden Share, on October 19 Lukashenko
signed a decree strengthening the government's powers under the
Golden Share. End summary.


The New, Improved Golden Share
--------------


2. (SBU) On October 19, Lukashenko signed decree 486, strengthening
the GOB's authority under the Golden Share. The decree states that
henceforth any decisions made by the GOB after it has invoked the
Golden Share are, "indisputable and not subject to appeal...
irrespective of the established procedure of approving decisions."
In other words, whatever the GOB says, goes, even if it violates
the Golden Share law.


3. (SBU) The GOB created the Golden Share law in 1997 to allow the
state to take over management of companies in certain
circumstances. In 2004, Lukashenko issued a decree allowing the
GOB to take over temporary management of any company in which the
GOB at any time in the past owned even one share. Although the law
states the Golden Share can only be used in certain circumstances
(such as after a company fails to pay wages for three months, or is
operating at a loss for six months),in practice the GOB has used
the Golden Share to nationalize a number of companies who do not
have such problems. The GOB uses the Golden Share to take over
temporary management of the company, then orders the company to
issue vast amounts of highly undervalued shares, and to give those
shares to the GOB.


Coercion as Effective as the Golden Share
--------------


4. (SBU) The GOB has found ways to gain control of companies
without using the Golden Share. On September 22, Lukashenko signed
Presidential Decree 442, giving the GOB majority ownership of the
Minsk Porcelain Plant. Previously, the state owned 9% of the
plant, with the other 91% owned by 1,680 individuals (most likely
plant employees). The decree ordered the plant to give 2,267,888
shares to the GOB and another 350,995 shares to Minsk city
authorities. This gave the GOB 95% ownership of the company.
These new shares were valued at BYR 500 [USD 23 cents] each. In
exchange for these shares, the GOB agreed to reschedule the plant's
debt and give the plant BYR 1.39 billion [USD 646,500] from the
state budget to modernize. In his decree Lukashenko also ordered
the plant to produce 2.7 million pieces of porcelain in 2005.


5. (SBU) On October 6, the GOB announced it was raising its stake
in Kovry Bresta (Brest Carpets) from 0.003% to 99.73% in exchange
for relief of BYR 15.694 billion [USD 7.3 million] in debt the
company owed the GOB. The GOB forced the company to issue new
shares worth BYR 130 [USD six cents]; previously its shares were
worth BYR 80,000 [USD 37] and the company was owned by its 2,400
employees.


6. (SBU) On October 12, the GOB convinced shareholders at the
Svetlogorsk paper mill to issue 1,447,525 new shares, valued at BYR
12,000 each [USD 5.58], and to surrender these new shares to the
GOB. This raised the GOB's share in the paper mill from 47.23% to
75.95%. In exchange, the GOB promised to invest in modernizing the
mill. This new emission of shares reduced the stake of the mill's
other owners: Russian companies Damino Associates, Bushnell Co. and
Iton Association had their shares drop from 14.04% to 6.4%, 13.92%
to 6.3% and 11.61% to 5.3%, respectively. Individual shareholders
saw their stake drop from 12.4% to 5.66%.

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7. (SBU) On October 20, Presidential Decree 482 gave Belarus'
fourth largest bank, Belinvestbank, the status of an "investment
bank" and ordered the bank to issue BYR 50 billion [USD 23.25
million] worth of new shares and give them to the GOB. The decree
also instructed the GOB to give the bank USD 10 million a year for
the next six years, and directed the bank to loan at least an
additional USD 100 million to state investment projects during the
same period. Before this decree, various GOB entities owned 84% of
the bank, with the National Bank of Belarus owning 41.7%, and the
Ministry of Economy and Belarusian State University each also owing
major portions. After the BYR 50 billion in new shares, the GOB
will own 92%.


8. (SBU) In January 2005, the GOB used the Golden Share to take
temporary control of the company Mozyr Refinery Plus (MNPZ). MNPZ
was created in 1995 when the Mozyr Oil Refinery was privatized. It
has never been state owned, and therefore the Golden Share could
not be legally used against MNPZ. MNPZ consists of 2,235 current
refinery employees and 700 retirees, and owns 12.252% of the Mozyr
Refinery (the GOB owns 42.757% and Russia's Slavneft owns 42.581%).
After the GOB invoked the Golden Share against MNPZ, it tried to
transfer 98% of the company to government ownership, claiming MNPZ
owed the GOB USD 4.7 million. MNPZ asked permission to sell 4% of
its shares, worth an estimated USD 5 million, to cover this debt,
but the GOB (which manages the company since it used the Golden
Share) refused. MNPZ members have repeatedly challenged the use of
the Golden Share in court, claiming it was used illegally since the
GOB never owned a single share of the company. In each case the
court has refused to hear the case. If the GOB succeeds in taking
over the company, it will control a majority of the Mozyr refinery.


Golden Share Scares Away Investment
--------------


9. (SBU) On October 27, Econoff met with Frank ter Borg, Economic
and Commercial Counselor for the Dutch Embassy in Warsaw (with
jurisdiction over Belarus). Borg explained that recently an
unnamed Dutch company had wanted to invest up to Euro 20 million in
a production facility in Belarus. However, as the facility would
have been built on land that was once a state-owned collective
farm, the company asked the Belarusian MFA if that meant the Golden
Share could be used to take control of the facility. The MFA never
responded, so Borg said the Dutch firm decided not to invest in
Belarus.


Comment
--------------


10. (SBU) Comment: The GOB continues to use the Golden Share and
similar means to re-nationalize the few parts of the Belarusian
economy that were privatized. In the immediate term this
aggressive policy is boosting state revenues and promoting state
social policies, such as full employment. However, such practices
will further weaken the Belarusian economy by expanding the share
of the economy ruled by state command, scaring off needed
investment, and complicating Belarusian efforts to join the WTO.

KROL