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In Russia, the village folk say that even a blind horse can pull a cart, if he is led.

In the case of Russia’s state insurer Rosgosstrakh, it is easy to see that the horse is being led in a circle; more difficult is to identify who has his hands on the bridle.

After selling a 49 percent stake in Rosgosstrakh to a still-secret consortium of foreign and Russian insurance interests, led by the Moscow investment bank Troika Dialog, the government is quietly considering a plan to release a controlling interest soon, according to a government source.

On July 26, at a session of government ministers, the program for privatization of state assets in 2003 was discussed, and a list of properties approved in principle. Rosgosstrakh was not on the list that has been publicly reported to date. However, the government source and officials in the insurance industry believe the 51 percent government stake in the insurer is likely to be sold, either in part or as a whole.

A source in the Property Relations Ministry said: “The strategic line of the government now is that the state should abandon participation in the capital of credit and financial organizations, including insurance companies.” All it would take, another ministry source claimed, is for the government to agree on a special order, and Rosgosstrakh would then be included in the privatization list.

A rumor has been circulating among Russian insurers this week that a secret plan will offer a 25 percent stake in Rosgosstrakh by the end of this year. According to government sources, this is “nothing more than a rumor.”

Natalya Starodumova, press secretary of Rosgosstrakh, said her “company is not in a position to comment on the government’s plans.” She added that Rosgosstrakh management believes it is unlikely the government will decide to sell the whole 51 percent stake in Rosgosstrakh in the near future, “because this would block realization of the program for payment of compensation to the clients of Gosstrakh.”

Gosstrakh, the Soviet-era state insurer, owed policyholders an estimated $1 billion when the Soviet Union collapsed, and Russia inherited the liability. Rosgosstrakh, as the designated successor to Gosstrakh, has been authorized by the Russian parliament to meet Gosstrakh’s obligations, and budget funds have begun to be appropriated for this purpose. Suspicion that Rosgosstrakh might evade payment of the Gosstrakh policyholders was the main factor that led the Russian parliament to torpedo an earlier attempt to privatize Rosgosstrakh in 1997. The attempt was masterminded by a group of Rosgosstrakh executives led by Vlasislav Reznik. He was fired. Today he supervises the Russian insurance industry from a seat in the Duma.

According to Starodumova, “the program of paying the Gosstrakh policyholders will take years to be completed, because the budget financing of the program is so small compared to the volume of the compensation to be paid.” Starodumova explained the redemption program is currently being administered by Rosgosstrakh “on the basis of a voluntary agreement with the government, and free of charge. It is doubtful that if the state sells all of its stake in Rosgosstrakh that the company would be in a position to continue the repayment program.”

However, a source inside Rosgosstrakh claimed it is possible that “the state may keep a blocking stake of shares in Rosgosstrakh, and sell about 25 percent of its shareholding.”

Sale of a control stake in Rosgosstrakh could be bad news for the Troika Dialog consortium, as the group faces fresh uncertainty over who will end up in control of the big insurer, and at what price. Last year, during the initial privatization of Rosgosstrakh, the consortium began complaining that the government was changing the terms of privatization after the share auctions had started.

When Troika Dialog paid just under $41 million for its 49 percent stake, the group of investors who are behind the bank issued an ultimatum, saying they would not reveal themselves, unless and until the government agreed to sell them majority control of the company.

Current Russian legislation, and majority sentiment in parliament, opposes the takeover of domestic insurers by foreign companies. The Troika Dialog syndicate strategy appears to be that, by appearing to dilute the foreign investment in their anonymous, Russian-led syndicate, it may be possible to evade the current legislative limits. Pressure from the World Trade Organization is also pushing Moscow to consider dropping the limits on foreign ownership of domestic insurance companies.

Reuben Vardanyan of Troika Dialog, and now chief executive of Rosgosstrakh, has hinted that, if this gambit fails, the foreign investor in his syndicate may sell out to the others in the group; while if full privatization is accepted by the government, the foreign investor may hold an option to buy out its Russian partners. In June Vardanyan went to London to smooth-talk insurance leaders on this and
related points.

A Rosgosstrakh source said the company badly needs to increase its charter capital in order to compete successfully with Russian and foreign insurance companies. He hinted that this may be the reason someone wants the government to plan for a new sell-off of shares. At the moment, the source said, to raise new capital for the company would “require the state to spend budget money on buying new shares, if they are issued. No such practice exists in Russia. The state has never allocated budget financing for the purpose of buying shares, and maintaining its shareholding in joint-stock companies.”

“Most likely,” he forecasted, “the state will leave Rosgosstrakh gradually, but it will take some time.”

Now can you tell which way the blind horse is trotting?

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