27.03.09

The presidential council set up to codify and improve civil legislation has proposed abolishing state corporations as a form of legal entity. It has suggested that existing state corporations, such as Vnesheconombank, Rostekhnologii (Russian Technologies), the Deposit Insurance Agency, Rosatom, Olympstroy (Olympic Construction), etc., should be converted into other forms of legal entity without special status or privileges. All seven of the state corporations that exist today were established during the presidency of Vladimir Putin.

The idea of abolishing state corporations as a form of incorporation is contained in the draft "Plan for the Development of Legislation on Legal Entities." This document was drawn up by the Russian presidential council on the codification and improvement of civil legislation and was published yesterday (18 March) on the Privlaw.ru website. President Dmitriy Medvedev ordered the plan drawn up under a decree dated 21 July 2008. Aleksandr Makovskiy, the council's deputy chairman, emphasizes that what has been produced so far is a draft plan, which "has been worked out in as much detail as possible to allow for a detailed discussion." A final version of the plan will be prepared around the beginning of May, according to Mr. Makovskiy. The document is to be submitted to Dmitriy Medvedev by 1 June, and amendments to the Civil Code and other laws will be drawn up once the plan has been approved.

The draft plan's greatest impact is on state corporations (of which there are seven in Russia, all established after the year 2000), which were created on the basis of special laws that give each of these entities special powers and special operating conditions. They are all treated as non-commercial entities and acquire ownership of state property. On 16 March, the president signed a law adopted by the State Duma on 20 February, exempting such property from corporate profit tax. The authors of the draft plan also point out that, in a number of cases, state corporations "are established primarily or even exclusively for the purpose of engaging in business activity."

The idea of abolishing state corporations as a form of incorporation is based on the fact that no such form really exists, and each state corporation has its own specific traits. The draft plan states that Rosatom, for example, "has powers of government that belong to the federal bodies of state power:" it can pass regulatory acts, dispose of budget funds, and possess its own militarized security units. "The fact that a state corporation combines the functions of a commercial entity with those of a body of state power ultimately means that the state could be held financially liable for the results of its business activities," Aleksandr Makovskiy says.

The authors of the plan are proposing to convert Rosatom, as well as the Olympstroy state corporation, into bodies of state power. Rosatom press service director Sergey Novikov believes that the idea of turning Rosatom into a federal body of the executive branch "means a complete return to the industry's previous structure, which seems inappropriate:" "The state corporation was established with the understanding that it would combine both business and state functions. For this purpose, the state corporation's statutes were adopted under a special government decree." Olympstroy was unable to comment on the initiative yesterday, claiming that it could not reach its senior managers.

The authors of the draft plan classify Vneshekonombank (VEB), the Deposit Insurance Agency (DIA), Russian Technologies, and Rosnanotech (Rosnanotekh) as commercial entities. They propose to convert these companies into business entities (LLCs or JSCs) that are wholly owned by the state. With respect to VEB, the authors of the document say that it, unlike other banks, is currently allowed to operate without a license from the Central Bank and without any supervision by the latter. This, the draft says, gives VEB "unjustified competitive advantages over other commercial banks," which "violates the principle of a unified Russian banking system under the control of the Central Bank." VEB itself declined to comment yesterday.

The authors of the document believe that DIA "is effectively an insurance company," which "clearly violates the state corporation's status as a non-commercial entity." DIA General Director Aleksandr Turbanov is convinced, however, that "this is still just the beginning of the discussion." "I hope that the final decision will be a sound one," he told Kommersant yesterday.

The activities of Rosnanotech and Russian Technologies are compared with those of a "specialized commercial investment bank." It is also noted that they can act "as the management company of any joint-stock companies, thereby taking such companies under their full control." Rosnanotech yesterday declined to comment on the idea of eliminating state corporations as a form of legal entity. "We have not received any information about this. The state corporation was established in accordance with the law, and that is what we go by," Rosnanotech Corporate Director Andrey Trapeznikov told Kommersant.

Aleksey Aleshin, first deputy head of Russian Technologies, believes that "this document might have been written by people who do not understand the legal nature of state corporations:" "At the current stage, no other form of incorporation would enable us to solve the specific tasks placed before us by the state." According to Mr. Aleshin, this is due, among other things, to Russian Technologies' foreign operations, as "this is all about legally exploiting the potential of Russia's embassies and permanent representative offices to promote the output of the state corporation's enterprises, including its military equipment." Besides, Mr. Aleshin explains, the goal of any open joint-stock company's operations is to make a profit, and the financial condition of most of the enterprises that were transferred to Russian Technologies by the state leaves much to be desired: "If we were a commercial structure, we would have to close down all of our unprofitable enterprises, but considering how important they are for the country's defense capabilities, this is completely out of the question." At the same time, Mr. Aleshin did not rule out the possibility that state corporations are a transitional form and might subsequently be converted.

In the opinion of the draft plan's authors, the Fund for Housing Construction Assistance is a "classic fund," and that is what it should be converted into. Aleksandr Bravermann, who heads the fund, was not available for comment yesterday.

The proposal calls for the state corporations to be converted gradually. As a first step, the authors of the document suggest establishing a legislative ban on the formation of new state corporations. In particular, they propose blocking the establishment of "Russian Roads, a state-owned company that is similar in status" (to a state corporation).

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Source: Kommersant