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Emerging markets - RUSSIA: The communist spectre

Last month, the Russian government invited Russian commercial banks to hold in trust large blocks of shares in leading oil and natural resource companies in return for loans to the government. No-one in Russia expects the government to repay these loans when they fall due this September.

The rationale behind Russia's controversial loans-for-shares scheme, say observers, is the reformers' desire to privatize as many state assets as possible while they still hold power.

If so, the strong showing of the Communist party in Russian parliamentary elections last month appears to vindicate these fears. As Euromoney went to press, preliminary results indicated that the Communist party might win as many as a third of all seats in the Duma (lower house of parliament).

The Russian loans-for-shares scheme is one of the most controversial privatization programmes devised. It has raised some cash for the government. But it remains to be seen whether it has improved corporate governance at the companies involved.

Last month, the Russian government invited Russian commercial banks to hold in trust large blocks of shares in leading oil and natural resource companies in return for loans to the government. No-one in Russia expects the government to repay these loans when they fall due this September. Instead, Russian banks look set to consolidate their holdings.

As a privatization technique, it has few fans. Western financial experts' descriptions of the scheme vary from, at the politest, "shady" to at the more emotive, "a rape of the country". Russian banks, especially those which feel they have lost out in a series of smash-and-grab raids on companies' shares, are also furious.

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