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From: shiryaev@novayagazeta.ru
Date: Tue, 11 Dec 2001

You can find the Russian version of this on our website. It may be of interests to those of your subscribers who are investors or follow developments in the securities market in Russia. www.novayagazeta.ru

This article was published in "Novaya gazeta" . December, 3-5, 2001. THE FOX IS BEST GUARDIAN OF THE HENHOUSE.

After a meeting of the cabinet of ministers, the head of the FKTsB (Russian Federal Securities Commision) Igor Kostikov, not hiding his joy said "The decision of the government in discussions about the Code (of Corporate Governance) is one of the decisive factors in defining corporate relations in Russia". He added that "participants in the meeting noted the high caliber of the document". According to the words of the head of the FKTsB, Premier Mikhail Kasyanov even proposed to start introducing the principals of the code first with companies in which the government is a shareholder.

However, market participants view the code unenthusiastically. "Civilized markets long ago determined the rules of the game according to which companies live" - says the coordinator of the Association for the Protection of Rights of Minority Shareholders - Sergey Karpov. Among the obligatory standards is full openness of information about shareholders, management and organs of governance of an issuer and conditions to prevent working through affiliated structures. That this condition is, for practical purposes, not reflected in the proposed text of the code is by no means accidental.

According to the Association for the Protection of Rights of Minority Shareholders this important condition did not make it into the code because Igor Kostikov created it not only as head of FKTsB, but as owner of investment company "Alexander V. Kostikov & Partners", created and fully controlled by him from 1993 until he entered government service in March 1999.

Representatives of the Association are certain that Kostikov, the civil servant, did not let his corporate offspring get away but still controls Group AVK through a network of offshore companies. Until March 1999 Igor Kostikov and his close relatives owned 90% of the shares of the company. But in 1999 Kostikov was appointed Deputy Chairman of the Committee of Financial Administration of St. Petersburg. According to the Law on Civil Service it is not possible to participate in commercial enterprises. At first the shares were distributed between managers with no right of resale. Usually such conditions attach to shares of purely nominal shareholders, and in reality the shares belong to someone else who does not wish to be known.

For this, the company Simpson Froud, which specializes in offshore structures, was employed. An interesting detail: one of the words in the name of the company sounds like the English word "fraud". Probably this is strange English humor.

So Simpson Froud founded, in the small English town of Orpington, Bishopsgate UK Investment Limited, to which was transferred ultimately the controlling stake in AVK. Coincidentally, right after Kostikov was appointed to be deputy chairman of the Committee of Financial Administration of St. Petersburg, the idea of holding a tender for the role of general agent for the city's municipal bond program was scrapped. In this way, AVK received an unlimited exclusive right from the St. Petersburg authorities to distribute at auction its bonds to investors.

It is not surprising that upon appointment of Kostikov the former Vice Governor and Chairman of the Committee of Finance of St. Petersburg, Igor Artemiev, said it was like appointing the "fox to guard the henhouse" and noted that it "created ideal conditions for corruption". Time has proven Artemiev to be right.

In a report by the Accounting-control chamber of St. Petersburg in 1999, it is reported that serious violations were uncovered in the activities of the city Finance Committee: in its own accounting documents it did not reflect all means which the city attracted through its bond offering. In particular, the reporting of the Finance Committee did not account for all operations conducted by AVK. The auditors, however, never received answers to their questions.

It probably is not necessary to say that with Kostikov's further advancement up the bureaucratic ladder, AVK also hit its stride. In March of 2000, Igor Kostrikov was appointed head of FKTsB. Before 6 months had passed, AVK was granted a totally unique array of licenses to operate on Russian securities markets. The decision about the appropriateness of issuing such licenses is, of course, taken by the FKTsB, which means not least by Kostikov. AVK became general agent of government debts and financial consultant to administrations in Sverdlovsk, Orenburg, Omsk, Kaliningrad and Khanti-Mansisk.

Today according to AVK, it controls more than 40% of municipal bonds in Russia.

Formally, however, according to documents AVK is not owned by Igor Kostikov but by the offshore company Bishopsgate. It turns out that 40% of Russian municipal bond markets are controlled by some unknown foreign firm.

This does not get in the way of Kostikov's work on the Code of Corporate Governance in Russia. This endeavor is not an easy one. On one hand he needs the Prime Minister to praise the Code, and on the other hand he needs not to loose anything through it. Hence there is virtually nothing in the document about affiliated structures.

It remains possible, however, to change the code. The final version of the code of Corporate Governance is due to be presented to the government at the end of January 2002. Right now, as Kostikov himself acknowledged, the FKTsB has plenty of corrections proposed by organization participating in discussions.

Will Kostikov-the civil servant forget about the interests of his offspring - AVK? This depends on the Code of Corporate Governance. Will it serve the interests only of affiliated, pocket companies or will it be of real use to the Russian market economy.

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