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Analysis & Opinion
18.03.10 Weaning Nanotech
By Tai Adelaja

All things being equal, the Russian State Nanotechnology Corporation, or “Rusnano,” will become the first state-owned company to be de-nationalized and transformed into a joint-stock company. The company’s officials insist, however, that they have not been caught off-guard by the state-imposed transformation. Rusnano’s conversion to a joint-stock company, which could come as early as the fourth quarter, is part of President Dmitry Medvedev’s plan to wean quasi-commercial structures off their total reliance on the state budget.

"In carrying out your orders, we analyzed the activities of all state corporations, in order to assess which of them are actually working in a competitive environment, and which perform public functions,” Economic Development and
Trade Minister Elvira Nabiullina told President Dmitry Medvedev during a meeting on March 16.

In comments after the meeting, Rusnano chief Anatoly Chubais signaled he was willing to go along with Medvedev’s plans. "The timeframe may be a bit tight, but it’s realistic," Chubais said, adding that, with government backing, the corporation could raise as much as 180 billion rubles ($6.15 billion) in the loan market. “The organizational and legal form of a public company is clear and transparent, and I think this will positively impact the price of borrowing.”

Chubais insisted that the planned privatization program announced by the economic development and trade minister was in sync with his own vision for the company’s development. "The main thing is that this is consistent with set objectives for the existence of Rusnano," Chubais was quoted as saying in an E-mailed statement by the company’s press service on Wednesday. “Last fall, Rusnano’s head Chubais expressed readiness to privatize Rusnano, albeit by 2015. Subsequently, Rusnano management has repeatedly stressed that the company is prepared to go public," the statement said. President Dmitry Medvedev appointed Anatoly Chubais, former chief of now-defunct power monopoly Unified Energy System, CEO of Rusnano in September 2008, a year after its formation.
Since then, the company has struggled to make its mark.

In a presentation in January, Chubais tried to position Rusnano as a new model for economic growth and a vehicle for establishing and advancing the Russian economy in the period between 2010 and 2020. Lately he has upped the ante for corporate diligence, unveiling plans this week to sell $1.7 billion worth of state-guaranteed bonds to fund expansion and new projects. In addition to more that 64 bilateral agreements he signed with Russian innovative companies, the Rusnano CEO promised to deepen links with Asia, with a focus on Singapore, which he regards as a microcosm for innovative breakthroughs.

Russia, he said, "has more than 100 hi-tech businesses in sectors that have continued since Soviet times, and these businesses have undergone technical refitting to world standards.” “The county has tens of new hi-tech companies equipped to world standards, each with annual sales of up to $100 million." Chubais said Rusnano is working in tandem with Moscow Interbank Exchange (MICEX) to develop a new exchange for innovative businesses, which is sometimes called the "Russian NASDAQ." With help from Rusnano, he said, the Institute of Stem Cells could become Russia’s first innovative company to float on the Moscow stock market in an initial public offering planned for December 10.

But for all his extensive sales pitches, the company’s accomplishments have been modest at best.
In the world rating of innovative activity, Russia holds 51st place out of 133 countries, behind Latvia, Hungary and Romania, according to the Global Competitiveness Report 2009–2010 prepared by the World Economic Forum.
State corporations, highly favored by Medvedev’s predecessor, Vladimir Putin, have always been seen by economists as upsetting the competitive environment. President Medvedev tends to see them as leeching off taxpayers. Last week, he made clear that connecting commercial and administrative functions in state corporations can breed corruption, adding that “improving the situation is good for the health of state-owned corporations, their bosses and the budget.”

“President Medvedev has said that the state currently owns or controls over 50 percent of Russia's economic activities. He has set a long-term target of cutting this to 30 percent, but has also said he wants to cut it to 40 percent within three to five years,” said Chris Weafer, chief strategist at UralSib. In 2007, Rusnano was formed along with VneshEconomBank, the Fund for Housing Reform, Olimpstroi, Russian Technologies and Rosatom, to promote innovative economic projects through the use and commercialization of nanotechnology, according to the company’s Web site.

In the fall of 2009, however, allegations of inappropriate and inefficient use of state funds threatened to swamp the company, and prosecutors swung into action, targeting key corporations including Rusnano, the Housing Maintenance Fund, Olimpstroi and Russian Technologies. In a report presented to president Medvedev last fall, prosecutors alleged that between November 2007 and July 1, 2009, Rusnano utilized only ten billion rubles ($342 million) out of the 130 billion rubles ($4 billion) it received to implement projects of the future of nanotechnology and the nanotechnology industry. Half of the sum used, prosecutors claimed, was spent on the company’s running expenses.

The report pointed out that of the 1,200 projects put forward in the corporation, only 36 were approved by its management board and only eight of those approved were actually funded. The findings became a watershed moment for the state corporations and led Konstantin Chuichenko, head of the Kremlin's control department, to propose converting some of them into joint-stock companies. In November, President Dmitry Medvedev ordered Vladimir Putin's government to act on amending existing legislation on state-owned corporations, but analysts said the move is facing resistance from government officials.

“The president is in a hurry to get the state out of running corporate Russia's boardrooms, but there is great resistance from officials that make a comfortable living from staying under the state umbrella,” Weafer said. “It will be a tough battle and progress will inevitably be slow.” Troika Dialog economist, Anton Stroutchenevski, said Medvedev's move to reform or disband state-owned companies, while laudable, has touched a raw nerve in the government. “It is a time bomb waiting to explode,” Stroutchenevski said. The creation of state corporations has always drawn opposition from liberal economists close to the government, including Nabiullina's predecessor and current Sberbank head, German Gref.

Nabiullina said she preferred to see state-owned companies that operate in competitive sectors privatized. “Some state corporations that perform a public function without impacting the competitive environment, such as the Deposit Insurance Agency, should be preserved as non-commercial entities,” Nabiullina said during the meeting with Medvedev.

Last week, she singled out three state corporations – Russian Technologies, VneshEconomBank and Rosatom – asserting that they “combine public functions with activities in a commercial environment.” “We have requested that they be given a transition period, during which their business assets and projects must be split off and transformed into a joint-stock company,” Nabiullina said.

Rusnano’s fortune is also taking a beating as the financial crisis rattled the economy, forcing the government to shrink its budget. Rusnano was able to raise its operating budget from 130 billion rubles ($4 billion) to 310 billion rubles ($10.6 billion), after the corporation asked the government to commit to a consolidated funding strategy up to 2015, Chubais told RIA Novosti in December. "It is no exaggeration to say that no other country in the world guarantees such a level of investment in the development of nanotechnology," Chubais said. "In this sense, all financial problems have been solved, we do not have them. In addition, we are already attracting credits to increase the volume of investment."

But with budget revenues projected to shrink by 30 percent this year, Finance Minister Alexei Kudrin has kept up the pressure on state corporations, demanding they fill in the vacuum left by shortfalls in revenue. A bill approved by the Cabinet on Tuesday would make Rusnano and the Housing Maintenance Fund return 85 billion rubles ($2.9 billion) and 75 billion rubles ($2.6 billion), respectively, to state coffers to help cover this year's deficit, Kudrin said.
“Rather than becoming a cash–cow for the budget, none of the state corporations formed in 2007 has done anything outstanding for the economy to justify continued state funding,” Elena Lebedinskaya, the head of Fiscal Policy at Russia’s Economic Expert Group, a think-tank, said. Lebedinskaya said that privatizing Rusnano is the only way to ensure transparency and accountability, adding that the government is on the right course to liquidate or transform other public companies.
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