Ultimate ownership and control in Russia

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Journal of Financial Economics 88 (2008) 169–192 www.elsevier.com/locate/jfec

Ultimate ownership and control in Russia$ Lucy Chernykh Bowling Green State University, Bowling Green, OH 43403, USA Received 16 January 2006; received in revised form 9 May 2007; accepted 17 May 2007 Available online 11 January 2008

Abstract I investigate ultimate control and ownership patterns in Russian publicly traded companies. I show that these companies are controlled either by the state or by anonymous private owners. Federal and regional governments’ control is exercised through extensive use of pyramids. Private owners widely exploit legal loopholes that allow them to mask their holdings and identities through nominee and foreign offshore arrangements. The comparison of formal and informal ownership disclosure reveals that the typical anonymous owners are insiders and that in virtually all cases the market participants ‘‘know’’ who the real owners are. Collectively, the evidence suggests that the legal weaknesses in disclosure requirements are important determinants of country-specific ownership and control structures. r 2008 Elsevier B.V. All rights reserved. JEL classifications: G32; G34; L33 Keywords: Ownership; Corporate control; Transparency; Corporate governance; Russia

1. Introduction This paper investigates ultimate control and ownership patterns in Russian publicly traded companies. It is the first empirical attempt to assess ownership structures of low transparency. Russian corporations have very distinctive ownership structures that have evolved rapidly as a result of mass privatization followed by fierce battles for corporate control. The ownership structures are highly concentrated but not easily observable as the owners have incentives to split their blocks intentionally and mask their identities through the use of nominees and foreign offshore companies. The owners’ incentives for secrecy may include but are not limited to tax avoidance, reluctance to reveal affiliation with structures involved in self-dealing, questionable origins of invested capital, and mitigation of political, criminal, and hostile takeover risks. The lack of trust between the authorities and large private businesses further enhances each of these incentives. The existence of residual

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This paper has evolved from my dissertation at Drexel University. I want to thank Samuel Szewczyk for his continuous support and valuable comments and my committee members Jacqueline Garner, Michael Gombola, Gordian Ndubizu, George Tsetsekos, and Raj Varma. The paper has benefited greatly from many insightful suggestions by Simeon Djankov (referee), Rebel Cole, and Robert Edmister. E-mail address: [email protected] 0304-405X/$ - see front matter r 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.jfineco.2007.05.005

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and strategic shareholdings of federal and regional governments in a large number of privatized companies is another distinctive feature of Russia’s corporate control models. Although corporate ownership in Russia has received considerable attention in the international corporate governance literature, systematic empirical studies are almost absent. All existing evidence relies on survey data and/or documents only immediate ownership. It also fails to identify anonymous private shareholders as a separate class of Russian ultimate owners. Nominee and offshore holdings are commonly assigned to various classes of investors based on respondents’ or researchers’ judgments. This paper makes the first systematic attempt to trace obscure control chains and to show the scope and specific arrangements of anonymous ownership in Russia. My major finding is that Russian traded companies are ultimately controlled by either the state or anonymous private owners. All other types of ultimate owners are insignificant. The legal loopholes that allow anonymous ownership lead to obscure control schemas. My results show that 85% of traded firms have at least one nominee or foreign offshore blockholding in their control chains, and the average cash flow rights of anonymous owners in these firms exceed 38%. Another distinct feature of Russian public companies shown in this study is extensive state participation through state-controlled pyramids and other control-enhancing arrangements, including golden shares. At the most conservative threshold of 50% of ultimate voting rights, the state controls as many as 37% of traded companies. Consistent with Bortolotti and Faccio (2004), these findings demonstrate that state participation does not always diminish as a result of privatization. It could just change its characteristics as direct state ownership is substituted by indirect state participation through statecontrolled holdings and other intermediate companies. From a corporate governance perspective, the transparency of ownership and control arrangements is important to allow investors to adequately estimate expropriation risks and potential conflicts of interest associated with the identity of the controlling shareholder. The importance of this information increases in an environment characterized by concentrated ownership, dominance of insiders’ control model, and weak institutional enforcement of investor protection. Anonymous ownership hides conflict of interest and allows controlling shareholders to engage in self-dealing transactions. Specifically, it masks the discrepancy between control and cash flow rights, the scope of insiders’ ownership, the motivation of board members, and the business group affiliation. To address the challenging task of identifying the ultimate owners of Russian companies, I rely on information that is hand-collected from official disclosure reports by public firms. The detailed information provided about owners and their registration addresses allows me to identify links that trace and reveal obscured affiliations. The study also shows multiple channels of informal ownership disclosure in Russia and reveals the possible identities of traced anonymous owners. The existence of informal disclosure explains why the regulators may know who stands behind certain questionable transactions but fail to officially detect a conflict of interest and to prosecute self-dealing.1 This paper contributes to the rapidly growing literature on the legal determinants of corporate governance and investor protection. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998, 2000) and La Porta, Lopezde-Silanes, and Shleifer (1999) show that legal differences are important determinants of the country-specific ownership structures. My findings extend this argument by showing that certain legal loopholes may completely undermine the overall effectiveness of formally adequate regulations. In particular, low disclosure thresholds and strict definitions of related parties’ transaction are worthless if the ultimate owners cannot be detected. Although literature on ultimate ownership commonly excludes companies with obscure ownership from empirical analysis, some studies note that nominee accounts and foreign offshore holdings may be used in a number of other emerging markets in Asia and Eastern Europe. By providing detailed insights on anonymous

1 The famous tunneling case with the national airline Aeroflot illustrates this paradoxical situation. For more than a year, Russian and Swiss prosecutors were trying to prove self-dealing. The prime suspect was quickly identified. But the thorough investigation of the tunneling schema through ‘‘a byzantine network of Russian and foreign companies’’ did not allow formal detection of the beneficiary. The partially uncovered, complex chain of affiliated firms is described as ‘‘a jumble of arrows and boxes that at first glance looks like a map of the human genome.’’ (‘‘Tycoon under Siege,’’ Business Week, July 24, 2000, p. 18).

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ownership schemas, this study may improve our general understanding of obscure control patterns around the world. The rest of the paper is organized as follows. Section 2 provides an overview of the evolution of corporate ownership and investor protection in post-privatization Russia and discusses institutional and legal origins of anonymous ownership. Section 3 describes my data and methodology used for the calculation of ultimate control and ownership rights within obscure control chains. Section 4 examines officially disclosed ultimate ownership patterns, firm-level ownership transparency, and specific arrangements of state and anonymous corporate control models. In Section 5, I make an attempt to go beyond officially disclosed information and analyze market experts’ beliefs on who actually controls sample firms. This section also focuses on the relative importance of state and anonymous private ownership in Russia by accounting for firm-size effects and by making cross-country comparisons. Section 6 concludes. 2. Investor protection and corporate ownership in Russia This section describes how the design and implementation of the privatization program in Russia, coupled with the gradual evolution of investor protection regulations, have shaped the distinct features of corporate ownership in Russia. It also provides an overview of the legal loopholes that allow anonymous ownership and discusses the discrepancy between the high quality of corporate governance rules and the low quality of actual investor protection. 2.1. Evolution of private ownership in Russia Privatization of state-owned enterprises in the former socialist countries of Central and Eastern Europe, including Russia, was supposed to serve as a trigger in their transition from planned to market economies. The choice of the particular privatization methods was heavily driven by country-specific considerations, including social pressure and political compromise. In the case of Russia, the privatization process consisted of several stages and various methods. Its major stage, mass (or voucher) privatization, took place from October 1992 to June 1994. Distribution of free vouchers to all citizens was accompanied by employees’ buyout schemas, with substantial benefits for insiders of privatized companies. The scale and speed of Russian mass privatization were unprecedented. In less than two years, about two-thirds of large and medium state-owned enterprises were transformed into joint-stock companies. The officially declared rationale for such a quick transformation was an early belief that private owners would be more efficient than the state. However, as shown in Black, Kraakman, and Tarassova’s (2000) comprehensive analysis of Russian privatization, new owners could maximize their wealth by creating new value in the company or by looting the existing one. Given the macroeconomic instability and virtual absence of investor protection at that stage, the second strategy produced larger immediate benefits. The design of Russian privatization led to the dominance of insiders with substantial shares allocated not only to managers, but also to dispersed employees. The role of outsiders was limited at this stage. Shareholdings of the voucher investment funds in individual companies were limited by regulation and in most cases were insufficient for effective control. The unfavorable and unpredictable macroeconomic and political situation in Russia in the early 1990s has largely contributed to the absence of foreign investors. Available evidence for the period 1994–1996 consistently shows large insiders’ ownership and dispersed stakes of outsiders. By using the surveys of privatized enterprises, Blasi, Kroumova, and Kruse (1997), and Filatochev, Wright, and Bleaney (1999) show that by the end of the mass privatization program, managers controlled about 20% of shares, workers about 40%, state between 10% to 15%, non-financial firms between 10% to 15%, financial institutions less than 10%, and the shares of foreign investors did not exceed 2%. The subsequent stages of privatization in Russia are often referred to as ‘‘money’’ privatization. From 1995 to 1997, the government changed priorities in an attempt to raise budget revenues and gain political support from emerging large private owners, implementing a controversial ‘‘loans-for-shares’’ schema. The government received loans from a few well-connected banks, using state-owned shares in a number of leading oil and metallurgy companies as collateral. Thereafter, it defaulted, and the shares were sold at a very low price through non-transparent auctions administrated by the interested banks. Although the schema involved only twelve companies, this episode in Russian privatization was important for the formation

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of financial-industrial groups as control of several natural resources monopolies was transferred to a few wellconnected business groups. All subsequent stages of privatization in Russia proceed in a ‘‘case-by-case’’ format. Every year the government approves a privatization plan which lists state-owned enterprises and blocks of shares to be privatized. The budget revenues, however, have been modest, and their major portion usually comes from the sale of a few shares in the most attractive companies each year. The dominance of natural monopolies, the military-industrial sector, and large, strategically important enterprises has also contributed to the uniqueness of Russian privatization. At the mass privatization stage, the federal government has locked in substantial shares in certain industries, such as gas, electric energy, oil, and telecommunications. As a next step, these shares were transferred to specially created state-controlled holdings. In a number of strategically important companies, the state retained control by issuing a golden share, a notable feature of which is its ability to grant large control rights, including veto power on certain important issues, without any cash flow rights. Local authorities can also hold substantial control rights in large public companies. Most of these stakes emerged in the 1990s when the federal government was weak and had to transfer some of its holdings to regional governments to repay its debts to regional budgets. The actual scope of state control in Russian companies is still largely unexplored. According to official estimates, by the middle of 2003, the federal government alone had direct stakes in 4,205 joint-stock companies.2 However, this number may heavily underestimate the actual scope of state control as it ignores indirect control rights. Although privatization has slowed down after the voucher and ‘‘loan-for-shares’’ stages, the process of ownership redistribution has not. The years immediately after mass privatization are characterized by a rapid increase in ownership concentration. Infant investor protection regulations, coupled with initially dispersed insider ownership, led to brutal control battles between insiders and outsiders for the majority stakes in the best companies. This process was accompanied by multiple abuses of shareholder rights, such as manipulation of shareholders’ registers, violations of basic procedures in general meetings, dilution of shares through new issues and closed subscription, asset stripping, transfer pricing, and other schemas that involve tunneling through management-affiliated private firms. Overall, Russian experience in early post-privatization years strongly supports the view that rapid privatization unaccompanied by investor protection leads to expropriation and selfdealing (Black, Kraakman, and Tarassova, 2000; Black, 1998; Coffee, 1999; Johnson and Shleifer, 2001). The period since 2000 is characterized by significant advances in investor protection legislation. After the new laws on joint-stock companies, securities markets, and bankruptcy were adopted, many initial methods of expropriation became impossible. The corporate governance code adopted in 2002 complies with all major recommendations of the OECD Principles of Corporate Governance. Although these developments could not completely stop hostile takeovers and minority shareholders’ abuses, the blatant violation of corporate and securities laws was gradually replaced with more sophisticated methods that exploit legal loopholes. While the formal laws on investor protection have dramatically improved in recent years, the enforcement of these regulations continues to be a major weakness. Indeed, modern Russia is a notable example of the discrepancy between the laws on the books and the effectiveness of their implementation. On one side, virtually all crosscountry studies that attempt to measure the level of investor protection report the high quality of formal corporate governance rules in contemporary Russia (Djankov, La Porta, Lopez-de-Silanes, and Shleifer, 2008; Slavova, 2000; Pistor, Raiser, and Gelfer, 2000). On the other side, the enforcement of these regulations remains weak. According to Djankov, La Porta, Lopez-de-Silanes, and Shleifer’s (2008) cross-country investigation of the regulation of selfdealing, there is a remarkable discrepancy between the ex-ante and ex-post private control of self-dealing in Russia. Although the country’s ex-ante private self-dealing index substantially exceeds the world average (0.89 versus 0.37), the ex-post index appears to be very low against the same benchmark (0.06 versus 0.53). 2.2. Anonymous ownership and investor protection I define anonymous owners as large private owners that employ various arrangements to conceal their identities, affiliation, and ownership rights. In the case of Russia, the major mechanism that allows owner 2

In addition to joint-stock companies with state participation, there were another 9,860 state-owned firms in the legal form of ‘‘state unitary enterprises.’’

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identity to be hidden without formal violation of disclosure requirements is the transfer of shares in the name of a nominee or private company registered in a foreign offshore center. Shell local companies and intentional splitting of the controlling block among several owners with unobservable affiliation can be used also. Anonymous ultimate ownership is one of the most serious drawbacks of the Russian corporate governance system. The current corporate law ignores the obvious: when ownership concentration is high and investor protection is weak, information about the identities of the controlling shareholders is fundamental for the assessment of corporate governance risks. From a legal perspective, anonymous ultimate ownership undermines a large number of investor protection provisions, such as restrictions on self-dealing and affiliated parties’ transactions. It simplifies tunneling, tax avoidance, capital flight, and money laundering through foreign offshore zones. It also imposes barriers on creditors’ claims and any administrative or criminal prosecutions of the controlling shareholders. Russian corporate law allows two categories of entities that can appear in the shareholders’ register: owners and nominees. A nominee is a depositary with a special license. They are mediators who act in their own name but represent the interests of their clients, the actual shareholders. This arrangement ensures confidentiality of the real owners. Formally, nominees are required to disclose the identity of their clients at general shareholders’ meetings. However, they can employ various obfuscations that allow them to avoid this disclosure.3 Consequently, other shareholders and even the company itself may be completely in the dark regarding the identity of the person or group of persons being masked by one or more nominees. Nominees allow the transfer of ownership stakes without public disclosure. The new owner stays under the original nominee while nothing changes in the shareholders’ register. Similarly, owners can change a nominee, split their blocks across several nominees, or share one nominee with a group of other owners. In these cases, market participants are left guessing whether these manipulations are associated with any actual transfers of ownership. Clearly, permitting these practices undermines the whole idea of ownership structure transparency. It also increases the asymmetric information between local and foreign investors as local experts can make better assessments of the identities of real owners. Foreign offshore firms are reported as ‘‘owners’’ and, at first glance, may be taken for foreign companies. Private firms registered in foreign offshore zones are not required to disclose their owners, and thus ownership is non-traceable. In most cases, investment in Russian firms by foreign offshore companies represents Russian capital by origin and is widely used for tax optimization. It is common for a Russian company to have several owners registered as foreign offshore firms. Affiliation between these holdings is unobservable, but likely. Moreover, nominees and foreign offshore holdings are not mutually exclusive and can be employed by the same real owner in various combinations. As in some other European countries and transition economies, the state in Russia may participate in the joint-stock companies through the so-called ‘‘golden share.’’ This is a special control right that the state has without any cash flow rights. It includes the right to veto during voting at the general meeting and also allows the state to directly appoint its representative to the board of directors. Other arrangements for separation of control from ownership rights in Russia are similar to those used in many countries and include preferred (non-voting) shares, pyramids, and cross-holdings. 3. Data and methodology 3.1. Data sources This study relies on the publicly available information for a large sample of Russian traded companies. The ownership data are hand-collected from the mandatory disclosure reports of public firms to the former Russian Federal Commission for Securities Markets (FCSM).4 All publicly traded companies in Russia are in the legal form of open joint-stock companies (OAO). FCSM regulations impose high standards for the ownership structure disclosure in these companies. Since Russian 3 A widely-used schema is to disclose foreign offshore firms as the ‘‘real owners’’. Since these firms, in turn, never disclose their owners, this information is not very useful for the company and its current and potential investors to determine true ownership. 4 In 2004, the Federal Commission for Securities Markets was reorganized into the Federal Financial Markets Service (FFMS).

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Table 1 Sample firms characteristics (2000–2002) The table reports sample selection procedure and industrial composition of the sample. Panel A describes sample selection criteria. The final balanced sample after excluding firms with missing data is 145 firms or 435 firm-years. Panel B reports industrial composition of 435 sample firm-years. The industrial distribution is based on the Russian industrial classification and reflects the Russian stock market industrial composition. Panel A. Sample selection procedure All RTS-listed firms by the end of 2002 Firms listed for less than 3 years Firms with missing reports Firms with missing ownership data Final sample

No. of firms

%

171 (17) (6) (3) 145

100.0 (9.9) (3.5) (1.7) 84.8

No. of firm-years

% of the sample

Panel B. Distribution of sample firms by industry Industry Electric energy Oil and gas Engineering Telecommunications Metallurgy Chemicals Transportation Food processing Finance Trade Pharmacology Total

No. of firms 52 23 20 14 13 7 6 3 3 3 1 145

156 69 60 42 39 21 18 9 9 9 3 435

35.9 15.9 13.8 9.7 9.0 4.8 4.1 2.1 2.1 2.1 0.7 100.0

corporations are allowed to issue preferred stock that may constitute up to 25% of the firm’s equity, the cash flow and the voting rights of each owner should be reported separately. The ownership structure disclosure threshold is set at 5% of voting or cash flow rights. The reported immediate owners, in turn, must disclose the identity of their own large shareholders at a 20% threshold. The collected ownership data are from fourth quarter reports for the years 2000–2002. Panel A of Table 1 reports the sample selection procedure. From all 171 companies listed in the Russian Trading System Stock Exchange (RTS) at the end of 2002, 27 companies are newly listed, delisted, or reporting incomplete data. Thus, the sample available for analysis in this study contains 145 companies and 435 annual observations. Since the sample contains almost all of the companies traded on the RTS from 2000 to 2002, it is representative of the firms listed on the Russian stock market. However, it is not representative of all Russian companies. Panel B of Table 1 shows that publicly traded companies in Russia tend to be large, and their industrial composition is heavily biased towards oil, electric utilities, telecommunications, and other strategically important industries. The average total assets of the pooled sample firms is $1,003.0 million and the median is $189.5 million. The total annual sales of the companies in my sample constitute about 19% of the Russian GDP. Thus, although the number of traded companies is relatively small in Russia, these are the largest public corporations in strategically important industries that play a significant role in the Russian economy. 3.2. The tracing of obscure control chains This subsection describes the methodology for identifying anonymous owners and tracing ‘‘knotty’’ control chains in the sample firms. The extremely low transparency of ownership structures in modern Russia requires special treatment to account for the presence of anonymous owners, unobservable affiliations, indirect federal and regional government agencies’ participation, and golden shares. To illustrate these arrangements unique to Russia, I present ownership structure examples in Figs. 1–5 later in this section (Section 3.3).

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Following the methodology of La Porta, Lopez-de-Silanes, and Shleifer (1999), I measure ownership by the total (direct and indirect) cash flow rights (CF) and control by total voting rights (V). For the purpose of this study, I identify ultimate owners at two alternative cut-off thresholds—25% and 50% of the voting rights. These thresholds are justified by high ownership concentration in Russia and correspond to blocking minority and absolute majority of control rights. My four broad categories of ultimate owners in Russia are state, anonymous ultimate owners, miscellaneous ultimate owners, and unknown ultimate owners. The state category refers to ultimate ownership by the federal or regional governments. Ultimate owners that are financial companies, foreign companies, individuals with disclosed identities, and private companies (in the legal form of ZAO, OOO, or former TOO) are classified as miscellaneous ultimate owners. Although ultimate owners classified as miscellaneous are largely absent in Russian traded companies, I maintain this classification for completeness. Elusive ultimate owners are classified as either anonymous or unknown. I define anonymous ultimate owners as those ultimate owners with traceable voting and cash flow rights but non-traceable personal identities. These are private investors who mask their identities under nominee accounts or in foreign offshore companies. Consequently, the formally disclosed ownership precludes deducing these shareholders’ management or citizenship affiliation. Assuming that common nominee5 and common registration address indicate affiliation, this research enumerates affiliated firms. I document three major types of anonymous ultimate owners in Russia—nominee, foreign offshore, and implied. This last category represents a group of formally independent offshores or local private companies with identical business addresses. If I can identify affiliations, although the identity of the ultimate owner is unknown, I can still calculate that owner’s cash flow and voting rights by totaling the rights of the affiliated firms. Unknown ultimate owner is a special category that I use for the most non-transparent cases. For unknown ultimate owners, neither voting nor cash flow rights can be determined. Among unknown ultimate owner structures, the most frequently observed case is an ownership structure in which the largest blockholder controls less than 25% of the voting rights. Despite the appearance that such a company is widely held, there are three possible scenarios. In the first scenario several blocks are held by nominees, foreign offshores, and/or private companies. Affiliation between these blocks is unobservable but plausible, and just a few affiliations can easily sum up to a controlling stake. In the second scenario the company simply does not disclose all substantial holdings of voting rights. In the third scenario an ultimate owner purports to be an unlisted open joint-stock company with no (disclosed) major shareholders. Since widely held open joint-stock companies are rare in Russia (if they exist at all), I assume that the last two scenarios are violations of FCSM disclosure regulations requiring disclosure of major shareholders, and I classify all such cases as ‘unknown’ ultimate owners. I further investigate the nature of anonymous ownership in Russia by calculating the total amount of nontransparent ownership in each sample firm and by showing the frequency of specific arrangements used to enhance non-transparency. I introduce two measures: (1) anonymous cash flow rights, and (2) non-reported cash flow rights. Anonymous cash flow rights distinguishes cash flow rights which are the aggregate holdings of all anonymous owners of a company, calculated as the percentage of total cash flow rights, both direct and indirect, held by nominees and foreign offshore firms. Non-reported cash flow rights are ‘‘free float’’ ownership rights calculated as 100% minus the percent of cash flow rights held by all reported direct blocks. Anonymous ownership and non-reported ownership measures capture the two main methods for building obscure ownership schemas, namely increasing ownership held by anonymous investors and/or reducing the amount of reported ownership rights. The latter can be realized either by splitting direct blocks into small stakes below reporting thresholds, i.e. below 5% of the equity, or, in violation of FCSM requirements, simply submitting an incomplete list of owners. A Russian traded firm might have up to 20–25% of its ownership non-reported because of shareholdings below the 5% disclosure threshold (free float). At the same time, due to very low stock liquidity and the small role played by dispersed shareholders in Russia, large values of nonreported ownership that exceed 25% are suspicious in most cases. 5 Technically, a nominee can represent several different owners; but, given the large selection of financial companies that are licensed for nominee operations in Russia, affiliation is the most likely reason for a group of company owners to keep their holdings under the same nominee.

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I measure total anonymous ownership with cash flow rights because the possibility of unobservable affiliations among non-direct anonymous owners precludes accurate estimation of their cumulative voting rights. I measure non-reported ownership with cash flow rights to have consistency with anonymous ownership measures in order to calculate the collective effect of the two. The anonymous and non-reported ownership stakes may act as substitutes or as complements. On the one hand, the sum of anonymous and non-reported ownership cannot exceed 100%. Consequently, a large volume of non-reported ownership potentially reduces the volume of anonymous cash flow rights. On the other hand, to mask the size of their actual holdings, some large shareholders may utilize both non-reported ownership and ownership under non-traceable identities. To account for these possibilities, I calculate the total amount of non-transparent ownership as the sum of the two measures. Finally, for completeness, I characterize the complexity of non-transparent control chains by providing descriptive statistics on size, frequency, and combinations of nominees’ and foreign offshores’ holdings in sample firms. 3.3. Examples of ownership structures The specific procedures I follow in calculating ultimate control and ownership rights and firm-level ownership transparency are presented in five diverse examples. Examples in Section 3.3.1 illustrate typical challenges to identification of the actual ultimate owners for non-transparent control structures and their suggested treatments. Examples in Section 3.3.2 illustrate complex arrangements for federal and regional governments’ participation in strategically important companies. 3.3.1. Examples of non-transparent ownership structures Fig. 1 presents the ownership structure of the joint-stock company (JSC) Siberian Oil Company (JSC Sibneft), one of the largest oil companies in Russia. As of the year 2000,6 ownership is shared among five nominees, none of which have more than 25% of the control rights in this company. Following traditional methodology, the company should be classified as widely held at a 25% threshold. However, all owners are anonymous, and some of them can be (and actually are) affiliated. Based on the officially disclosed ownership structure, I classify the company as ‘‘ultimate owner unknown.’’ Although JSC Sibneft formally reports the holders of 87.72% of its cash flow rights, its ownership is completely non-transparent. Fig. 2 diagrams the 2000 ownership structure for the JSC Chelyabinsk Tube-Rolling Plant, a monopolistic producer of large diameter pipes for Russian oil and gas companies. As in the JSC Sibneft example, this company appears to be widely held, at least initially, as no owner has control at the 25% threshold. However, closer examination of the disclosure report reveals that two offshore companies in the second layer of the ownership structure have exactly the same registration address and almost identical firm names. After establishing this affiliation, one can easily discern that another two offshore companies with direct blocks in JSC Chelyabinsk Tube-Rolling Plant are 100% controlled by the affiliated firms in the second layer of ownership. In other words, there exists a large block controlled by some unobservable ultimate owner, and this block is intentionally split across several offshore companies. The separated parts of this block account for at least 29.90% of total voting rights. Such cases are classified as ‘‘implied’’ ultimate owner. The major difference with the ‘‘unknown’’ ultimate owner is that voting and cash flow rights for the blocks controlled by implied ultimate owners can be calculated. There can, of course, be other unobservable participants in this block as the total ownership rights of all anonymous owners of this traded company add up to 56.48% of equity. My approach assumes the conservative estimation. It captures the lowest possible concentration of the ultimate owner control rights (in this case, 29.90%), while the total volume of anonymous ownership may be interpreted as a proxy for the highest possible level of their actual concentration (in this case, 56.48%). The example in Fig. 3 shows an ownership structure of the JSC Kirov Tire Plant. It is a good illustration of how ‘‘knotty’’ the ownership schemas can be in Russia. At first glance, the ultimate owner is the nominee in the first layer of the control schema (V ¼ 37.2%). However, all three Cyprus offshore companies are registered at exactly the same address. Once I discern this affiliation, the underlying idea of the control schema becomes 6

In 2005, the controlling stake in Sibneft was acquired by state-controlled gas monopolist Gazprom.

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JSC Sibneft (year 2000)

CF = V = 22.81%

CF = V = 21.06%

CF = V = 19.58%

CF = V = 17.43%

CF = V = 6.84%

Nominee 1

Nominee 2

Nominee 3

Nominee 4

Nominee 5

Fig. 1. Joint-stock company Siberian Oil Company (Sibneft) in year 2000: unknown ultimate owner.

Calculation procedures: (1) Direct ownership: the largest direct owner is Nominee 1: V ¼ 22.8%, CF ¼ 22.8%. (2) Ultimate ownership: ultimate owner is unknown. (3) Ownership transparency: Non-reported ownership: CF ¼ 100%(22.8%+21.6%+19.58%+17.43%+6.84%) ¼ 12.28%; Anonymous ownership: CF ¼ 22.8%+21.6%+19.58%+17.43%+6.84% ¼ 87.72%; Sum of non-reported and anonymous CF rights: 100%; Number of anonymous owner: five nominees. (4) State participation: all-private public company.

evident: the implied ultimate owner who stands behind all three offshore firms controls an absolute majority of the voting rights. This controlling stake of 55.97% of voting rights is built from relatively small blocks.7 3.3.2. Examples of state participation The example in Fig. 4 presents the ownership structure of the JSC Central Telecommunication Company (or JSC CenterTelecom), a monopolistic telecommunication company in the Central European part of Russia. Like most Russian regional telecoms, CenterTelecom is controlled by Telecommunication Investment JSC (also known as JSC Svyazinvest). The controlling stake in JSC Svyazinvest belongs to the federal government. As shown in my calculations (provided in the comments to Fig. 4), while the direct voting rights of the state total only 9.6%, the total state voting rights in CenterTelecom (direct and indirect) are much higher at 60.3%.8 The separation between ultimate owner control and ownership rights measured by the V/CF ratio is also high at 1.69. In this example, the state enhances its control rights relative to its ownership rights through the presence of non-voting shares and by pyramiding. There are also two state agencies in the control chain, one of which has both direct and indirect stakes. The example in Fig. 5 illustrates a more complex case. It presents the ownership structure for JSC Nizhnekamskshina, Russia’s largest producer of tires. The ultimate controlling shareholder is a regional level state agency that has multiple direct and indirect stakes in the company through a chain that involves three intermediate joint-stock companies. Further, the regional authority controls golden shares at two different layers, as shown on Fig. 5. Overall, the state enhances its control rights by a pyramid corporate structure, a single agency ownership of multiple companies, control of golden shares, and issuance of nonvoting shares. In sum, five examples illustrate how ultimate owners in Russia may build obscure control structures that are not evident from direct blockholdings. 7 Recent corporate events in this company allowed me to verify my results through the out-of-sample period observation. In the first quarter of 2003, JSC Kirov Tire Plant officially disclosed that 56% of its equity is controlled by the private firm Holding company AMTEL. Note that 56% coincides with my estimation of the implied ultimate owner control rights for this company (55.97%). In June 2003, Holding company AMTEL acquired additional blocks to ensure more than 75% of control rights in the plant. In October 2003, the Kirov Tire Plant was renamed JSC Tire Complex AMTEL - Volga region. 8 Official statistics will report an even smaller state stake in this company (7.19%) as it measures state participation by its direct cash flow rights.

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JSC Chelyabinsk Tube-Rolling Plant (year 2000)

CF = V = 15.05%

CF = V = 14.85%

CF = V = 9.27%

Foreign offshore company 1

Foreign offshore company 2

Foreign offshore company 3

Private company 1

CF = V = 7.94% Nominee

CF = V = 5% Private company 2

V = % CF 5 0 =

Foreign offshore company 4

V = % C F 50 =

CF =5 =V 0% C = F= 50 V %

CF = V = 18.64%

Foreign offshore company 5

Both companies have almost the same name and exactly the same address.

Implied ultimate owner

Fig. 2. Joint-stock company Chelyabinsk Tube-Rolling Plant in year 2000: implied ultimate owner.

Calculation procedures: (1) Direct ownership: the largest direct owner is foreign offshore company 1: V ¼ 18.64%, CF ¼ 18.64%. (2) Ultimate ownership: ultimate owner is implied through the address affiliation between foreign offshore company 4 and foreign offshore company 5. Once this affiliation is uncovered, it becomes evident that foreign offshore companies 2 and 3 are 100% controlled by the affiliated offshore companies 4 and 5. Implied ultimate owner rights: CF ¼ V ¼ 15.05%+14.85% ¼ 29.90%. (3) Ownership transparency: Non-reported ownership: CF ¼ 100%(18.64%+15.05%+14.85%+9.27+ 7.94%+ 5%) ¼ 29.25%; Anonymous ownership: CF ¼ 18.64%+15.05%+14.85%+7.94% ¼ 56.48%; Sum of non-reported and anonymous CF rights: 29.25%+56.48% ¼ 85.73%; Number of anonymous owners: one nominee and five foreign offshore companies. (4) State participation: all-private public company.

4. Evidence from official disclosure reports 4.1. Direct ownership I start my investigation of controlling shareholders in Russian traded companies with an analysis of direct ownership structures. Panel A of Table 2 shows the distribution of direct blockholdings. The percentage of voting shares tied up in blocks over 5% is, on average, 70.67%, and the largest direct shareholder owns about 46.19%. The number of direct blocks tends to be small (mean ¼ 2.89, median ¼ 3), and there are substantial gaps in the voting power between the largest, the second largest, and the third largest direct shareholders. Collectively, the evidence suggests a high degree of direct ownership concentration. Panel B of Table 2 presents the identities of the largest direct blockholders. The dominant type is the open joint-stock company (56.3% of sample firms). This category of largest direct owner also stands out for having, on average, the highest level of ownership concentration and controlling an absolute majority (53.88%) of voting shares. The only other important category of largest direct blockholders consists of anonymous private owners masked under nominees (16.1% of sample firms). Widely held open joint-stock companies are very rare (if not non-existent) in Russia. Therefore, the dominance of open joint-stock companies among the largest direct shareholders has two implications. First, it

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179

JSC Kirov Tire Plant (year 2001)

CF = V = 6.67%

CF = V = 37.2%

CF = V = 19.82%

CF = V = 19.73%

CF = V = 9.75%

Private company 1

Nominee

Foreign offshore company 1

Foreign offshore company 2

Private company 2

CF = V 26.5%

CF = V 53.3%

Private company 3

CF = V 50% Individual 1

CF = V 50% Individual 2

CF = V 50% Individual 3

CF = V 50%

CF = V 94.08%

Individual 4

Foreign offshore company 3 All three foreign offshore companies have exactly the same address, but do not have any formal ownership relations

Implied ultimate owner

Fig. 3. Joint-stock company Kirov Tire Plant in year 2001: implied ultimate owner.

Calculation procedures: (1) Direct ownership: the largest direct owner is a nominee: V ¼ 37.2%, CF ¼ 37.2%. (2) Ultimate ownership: ultimate owner is implied through the address affiliation between three foreign offshore companies. Implied owner rights: V ¼ 6.67%+9.75%+19.82%+19.73% ¼ 55.97%; CF ¼ 3.3% (0.0667)+19.82%+19.73%+9.75% (0.9408) ¼ 52.28%. (3) Ownership transparency: Non-reported ownership: CF ¼ 100%-(6.67%+37.2%+19.82%+19.73%+9.75%) ¼ 6.83%; Anonymous ownership: CF ¼ 53.3% (.0667)+37.2%+19.82%+19.73%+94.08% (.0975) ¼ 89.48%; Sum of non-reported and anonymous CF rights: 6.83%+89.48% ¼ 96.31%; Number of anonymous owners: one nominee and three foreign offshore companies. (4) State participation: all-private public company.

reveals that the majority of sample firms are controlled through pyramidal structures. Second, it suggests a possibility of substantial discrepancy between the identities of direct and ultimate owners and justifies further tracing of control chains. 4.2. Ultimate ownership and separation of control and ownership rights Table 3 documents ultimate owners’ identities at voting rights thresholds of 25% and 50%. A large proportion of sample firms, 84.6%, have an ultimate owner at a 25% threshold. At a 50% cut-off point, almost one half of the sample, 46.4% of companies, has an identifiable ultimate owner. On average, at a 25% threshold, the ultimate owner controls 49.33% of voting rights and 56.40% of voting rights at a 50% threshold. These concentration measures, however, may be biased downwards given the possibility of nontraceable affiliations among blockholders. An unexpected observation from Table 3 is the high ultimate ownership of the state. At the 25% threshold, the federal government is the largest ultimate owner in 48.1% of the sample firms. Regional governments control another 9.4% of traded companies. At the most conservative threshold, 50% of total voting rights,

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180

JSC CenterTelecom (year 2002)

CF = 38% V = 50.7% Open joint-stock company

CF = 10.84% V = 7%

CF = 9.98% V = 7.4%

CF = 7.19% V = 9.6%

Nominee 1

Nominee 2

Federal state agency 2

CF = V = 50%+1share

CF = V = 25%-2 shares

CF = V = 25%+1 share

Federal state agency 1

Federal state agency 2

Foreign offshore company

Fig. 4. Joint-stock company CenterTelecom in year 2002: state-controlled public company.

Calculation procedures: (1) Direct ownership: the largest direct owner is an open joint-stock company (JSC Svyazinvest): V ¼ 50.7%, CF ¼ 38%. (2) Ultimate ownership: ultimate owner is the federal government: V ¼ min [50.7%, (50%+25%)]+9.6% ¼ 60.3%; CF ¼ (50%+25%)(0.38)+7.19% ¼ 35.69%. (3) Ownership transparency: Non-reported ownership: CF ¼ 100%(38%+10.84%+9.98%+7.19%) ¼ 33.99%; Anonymous ownership: CF ¼ 25%(.38)+10.84%+ 9.98% ¼ 30.32%; Sum of non-reported and anonymous CF rights: 33.99%+30.32% ¼ 64.31%; Number of anonymous owners: two nominees and one foreign offshore company. (4) State participation: state-controlled public company. Federal government controls absolute majority of total voting rights.

the state controls 37.0% of firms. Obviously, the reality that the state is the largest controlling shareholder in a large proportion of traded companies is masked in official statistics reporting only direct ownership. Indeed, based on direct ownership structures (Table 2), the state, represented by the federal and regional authorities, is the largest shareholder in a rather modest proportion of observations, namely in 14% of firm-years. Such a large discrepancy between total and direct voting rights demonstrates that the state, the federal government in particular, achieves control primarily through its intermediate holdings. Moreover, this empirical evidence of the dominant role still held by the state seriously puts into question the actual results of privatization in Russia. Another notable observation from Table 3 is the important role of anonymous private investors. At a 25% threshold, 22.5% of sample firms are controlled by ultimate owners who mask their identity under nominee accounts (17.2%), in foreign offshore companies (1.6%), or in groups of affiliated firms (3.7%). The descriptive statistics in Table 3 also show that local institutional investors are absent among ultimate owners in Russia.9 The role of large foreign investors is also limited: only 1.4% of sample firms are controlled by foreign ultimate owners at the 25% threshold and 0.5% at the 50% threshold. These results also deviate from official statistics which do not distinguish between actual foreign investors and foreign offshore firms that almost always represent Russian capital. In summary, my results reveal unique ownership structures in Russian public companies. The two dominant classes of ultimate owners are the state and anonymous private investors. The role of identifiable individuals, 9

By analyzing direct ownership structures, I find that local financial institutions own blocks of shares in excess of 5% in only 8.94% of sample firms. The institutions’ average voting rights in these companies are 10.06% (the median is 9.60%). Taking into consideration the high concentration of voting rights in Russia, these holdings are insufficient to exercise effective control and can guarantee only cash flow rights.

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181

JSC Nizhnekamskshina (year 2000)

CF = 34.59% V = 36.91%

CF = 18.36% V = 19.52%

CF = 5.32% V = 5.67%

CF = 0% V = Veto

Open joint-stock company 1

Private company

Open joint-stock company 2

Regional golden share

CF = 5.8% V = 6.24%

CF = 0% V = Veto

CF = V = 50%

Open joint-stock company 3

Regional golden share

CF = 31.37% V = 33.49%

CF = V = 50.01%

CF = V= 36.3% Foreign company

Regional state agency Fig. 5. Joint-stock company Nizhnekamskshina in year 2000: state-controlled public company.

Calculation procedures: (1) Direct ownership: the largest direct owner is an open joint-stock company: V ¼ 36.91%, CF ¼ 34.59%. (2) Ultimate ownership: ultimate owner is the regional government: V ¼ min [36.91%, (33.49%+min (6.24%, 50.01%)]+min (5.67%, 50%) ¼ 45.4%; CF ¼ 31.37%*(0.3459)+50.01%*(0.058)* (0.3459)+50%*(0.0532) ¼ 14.51%. (3) Ownership transparency: Non-reported ownership: CF ¼ 100%(35.49%+ 18.36%+5.32%) ¼ 40.83%; Anonymous ownership: CF ¼ 0%; Sum of non-reported and anonymous CF rights: 40.83%; Number of anonymous owners: none. (4) State participation: state-controlled public company. Regional government controls absolute majority of total voting rights.

financial institutions, and foreign investors is negligible. This finding has important corporate governance implications. The absence of controlling shareholders with superior monitoring ability, such as foreign and institutional investors, combined with the dominance of potentially less effective owners, such as the state and anonymous individuals, may explain the overall weakness of internal corporate governance mechanisms in Russian public companies. Table 3 also reports the separation between control and ownership for all types of ultimate owners as measured by the ratio of voting rights to cash flow rights. The average voting to cash flow ratio for sample firms is 1.52 at the 25% threshold and 1.61 at the 50% threshold. Of course, these ratios may be underestimated due to the low transparency of control chains and my inability to trace all affiliations among nominees and foreign offshore firms. However, even this conservative estimation reveals a substantial discrepancy between control rights and ownership rights of ultimate owners.

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Table 2 Direct ownership structure: concentration of voting rights and identities of the largest direct blockholders (435 firm-years, 2000–2002) The table provides summary statistics for direct blockholdings over 5% of voting rights. Panel A describes direct ownership concentration. Panel B reports identities and control rights of the largest direct blockholders. Panel A. Concentration of direct voting rights (% of voting shares)

Mean

Median

Sum of voting rights tied up in blocks (% of voting shares) No. of blocks in a company Voting rights distribution (% of voting shares): Largest block 2nd largest block 3rd largest block All other blocks

70.67 2.89

72.72 3.00

46.19 13.58 6.11 4.68

49.00 13.66 5.90 0.00

Panel B. Identities and voting rights of the largest direct blockholdes Largest direct blockholder

Open joint-stock company Nominee Regional government Private firm Federal government Offshore Foreign Individual Financial institution Total

Firm-years

Concentration (% of direct V rights)

No.

%

Mean

Median

245 70 35 31 26 17 7 4 0 435

56.3 16.1 8.1 7.1 6.0 3.9 1.6 0.9 0.0 100.0

53.88 42.15 35.43 29.71 37.60 22.51 35.15 44.02

50.79 41.31 33.49 19.86 31.82 19.70 32.87 50.72

46.20

49.00

The state has the highest voting to cash flow rights ratios among the classes of ultimate owners. The mean ratio for the federal government at the 25% threshold is 1.79, and the median is 1.90. This finding giving the state the highest voting to cash flow rights ratio has two possible explanations. The first explanation relates to the absolute transparency of state holdings at all hierarchical levels of the control chain and argues that if it were possible to thoroughly trace the affiliations of nominees and other anonymous owners within the control chain, then the voting to cash flow ratios of these private ultimate owners could exceed those documented for the state. An alternative argument is that the state as an ultimate owner is indeed distinguished by the intensive usage of control-enhancing devices. To distinguish between the two hypotheses, I examine the frequency of control-enhancing methods used by the state and by all other investors. I split my sample into state-controlled and all other public companies at the most robust threshold, 50% of voting rights. Empirical results are presented in Table 4. As shown in Table 4, the absolute majority of Russian publicly traded companies, 51.7% of sample firm-years, are controlled through pyramids. Another popular arrangement is non-voting stock: 46.2% of sample firms have preferred stock in their equity. Cross-holdings and golden shares are less frequent among Russian traded companies and are used in 6.0% and 5.8% of cases, correspondingly. The total percentages in Table 4 exceed 100% because ultimate owners may use any combination of these mechanisms for enhancing their control rights. The evidence across control-type subsamples in Table 4 indicates state-controlled firms are much more active than other firms in pyramiding and issuing non-voting shares to minority shareholders. I find that 85.7% of state-controlled public firms are controlled through pyramids, and 74.5% of state-controlled public firms have non-voting shares in their equity. The corresponding numbers for all other sample firms, privatelycontrolled or widely held at a 50% cut-off, are 31.2% and 29.6%. The differences between the state’s use of these control arrangements and their use by private owners are statistically significant at the 1% level. Private owners, however, make greater use of cross-shareholdings. The difference in the frequency of adoptions of golden shares is not statistically significant between the two subsamples.

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Table 3 Ultimate owners’ identities at 25% and 50% threshold of the voting rights (435 firm-years, 2000–2002) The table reports ultimate owners’ identities of sample firms at two alternative control thresholds. The detailed definitions of ultimate owners’ types are provided in Section 3. Voting to cash flow ratio (V/CF) measures separation of control and ownership rights. Panel A describes the frequency of ultimate owners’ identities and their control and ownership rights at 25% threshold. Panel B reports these descriptive statistics at 50% threshold of total voting rights. Ultimate owner

Firm-years No.

%

V rights, % Mean

Panel A. Ultimate owners at 25% threshold of voting rights Federal government 209 48.1 52.48 Regional government 41 9.4 42.20 Nominee 75 17.2 47.59 Offshore 7 1.6 30.64 Implied 16 3.7 47.16 Individual 6 1.4 47.07 Private firm 8 1.8 51.45 Foreign 6 1.4 37.05 Widely held at 25% 67 15.4 Total 435 100.0 49.33 Panel B. Ultimate owners at 50% threshold of voting rights Federal government 148 34.0 55.07 Regional government 13 3.0 55.52 Nominee 29 6.7 59.47 Offshore 0 0.0 Implied 5 1.1 70.46 Individual 3 0.7 54.09 Private firm 2 0.5 89.37 Foreign 2 0.5 50.55 Widely held at 50% 233 53.5 Total 435 100.0 56.40

CF rights, %

V/ CF ratio

Median

Mean

Median

Mean

Median

51.60 39.68 46.01 30.00 40.97 48.31 43.65 34.19

30.77 37.06 41.49 29.91 46.87 47.07 46.16 37.05

26.33 35.30 39.58 29.90 40.97 48.31 35.17 34.19

1.79 1.23 1.22 1.02 1.01 1.00 1.18 1.00

1.90 1.00 1.00 1.00 1.00 1.00 1.00 1.00

50.67

35.04

29.43

1.52

1.58

53.88 53.05 56.95

33.04 48.55 51.82

28.50 51.18 55.32

1.76 1.16 1.26

1.81 1.06 1.01

67.62 53.71 89.37 50.55

69.52 54.09 89.37 50.55

67.62 53.71 89.37 50.55

1.02 1.00 1.00 1.00

1.00 1.00 1.00 1.00

53.88

38.68

30.89

1.61

1.74

Table 4 Means of enhancing control rights over voting rights (435 firm-years, 2000–2002) This table reports percentages of firms that use different control arrangements. The total percentages do not add up to 100% as a firm can use any combination of control-enhancing methods. Definitions of these methods are provided in Section 2. State-controlled firms are defined as publicly listed firms where the federal or regional government holds absolute majority of total control rights. All other firms, privately-controlled or widely held at a 50% threshold, are those firms where the state has zero or less than 50% of control rights. The last column reports the significance of Chi-square statistics, 1 df, for the difference in percentages of firms in the two defined subsamples that have adopted each type of control-enhancing arrangements. Means of enhancing voting rights over cash flow rights Pyramiding Non-voting shares Crossholdings Golden share

All firm-years (N ¼ 435)

Ultimate owner type at a 50% control threshold

No.

%

No.

%

No.

%

p-Value for w2 statistic (difference in percentages)

225 201

51.7 46.2

138 120

85.7 74.5

87 81

31.2 29.6

.00 .00

26

6.0

5

3.1

21

7.7

.05

25

5.8

9

5.6

16

5.8

.91

State (N ¼ 161)

Private or ‘‘widely held’’ (N ¼ 274)

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Table 5 Identities of the ultimate owners by industries (435 firm-years, 2000–2002) The table reports distribution of sample firms by the ultimate owner type in six industrial subsamples at a 25% control threshold. Ultimate owner

Federal government Regional government Nominee Offshore Implied Individual Private firm Foreign Widely held at 25% Total

Electric energy (N ¼ 156)

Oil and gas (N ¼ 69)

92.3

26.1

5.0

83.3

1.9

10.2

15.0

9.5

7.7

21.8

3.2

47.8 2.9

30.0

2.4

11.7 3.3 6.7

23.1 7.7 5.1 7.7

4.8

13.0 2.9 10.1 1.5 2.9 7.3 27.5 100.0

2.6 100.0

13.0 100.0

Engineering (N ¼ 60)

28.3 100.0

Telecoms (N ¼ 42)

100.0

Metallurgy (N ¼ 39)

Other (N ¼ 69) 13.0

2.6 46.1 100.0

Table 5 reports ultimate owners’ identities across six industrial subsamples at the 25% threshold of voting rights. There are pronounced differences in ultimate control structures across industrial sectors. The federal government is the ultimate owner in a large number of firms in electric energy and telecommunications, where it controls 92.3% of electric energy firms and 83.3% of telecoms. The major mechanism for state control in these industries is pyramiding through state-controlled holdings. In the case of electric energy companies, control is exercised through the JSC United Energy System of Russia, which is majority-controlled by the state. Regional telecoms in Russia are controlled through the state-controlled holding JSC Svyazinvest. In the oil and gas industry, the state role is less pronounced but still large. Federal and regional governments control 36.3% of oil companies. The role of anonymous private investors masked behind nominees is also large in this industry as 47.8% of oil companies are controlled by nominees. Anonymous ultimate owners, such as nominees, foreign offshore firms, and groups of affiliated private firms, are prevalent in engineering (41.7% of firms) and metallurgy (35.9% of firms). Firms in ‘‘other’’ industries provide a larger variety of ultimate owners. However, the dominant types are still anonymous owners and the state. Table 5 also shows that officially disclosed ownership structures contain a high percentage of widely held firms in metallurgy, engineering, and ‘‘other’’ industries. In metallurgy, for example, the largest ultimate owner in 46.1% of firms controls less than 25% of the voting rights. At the same time, market analysts strongly believe that the process of majority control consolidation was largely finished in this industry by the year 2000.10 My results indicate that the ultimate owners in these industries may not only mask identities under nominees and foreign offshore firms, but also intentionally split controlling blocks into multiple small stakes. Overall, my results demonstrate the dominance of the two distinct types of ultimate owners in sample firms—the state and the anonymous private investors. They also reveal the low transparency of control arrangements as even the state control is not directly observable from immediate ownership. 4.3. Additional evidence on non-reported and anonymous ownership The previous section provides evidence of the high incidence of anonymous ultimate owners in Russian public companies. However, the procedure for identifying the largest ultimate owners does not account for the possibility of unobservable affiliation among anonymously controlled blocks. In other words, by focusing only on the officially reported largest controlling shareholders, I may heavily underestimate the actual concentration of non-transparent ownership in Russia. 10

Source: ‘‘Komu prinadlezhit Rossiya’’ (‘‘Who Owns Russia’’), ‘‘Kommersant-Vlast’’, May 16, 2000.

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To address the problem, I consider alternative approaches to the estimation of firm-level ownership structure transparency. As discussed in Section 3.2, I distinguish two basic methods that reduce ownership transparency. These are the limitation of disclosed ownership rights (non-reported ownership), and/or hiding shareholders’ identities and affiliation under nominees or foreign offshore firms (anonymous ownership). In this section, I estimate the total obscure ownership in each sample firm by calculating cash flow rights owned by all nominees and offshore firms, cash flow rights that are not disclosed in the mandatory reports, and the sum of the two. To be conservative, I rely on cash flow rights instead of voting rights because affiliation among various blocks is plausible but unobservable. Non-reported ownership is calculated as 100% minus the percent of cash flow rights held by all reported direct blocks. In general, due to the low liquidity of the Russian stock market and limited scope of dispersed ownership, I assume that non-reported ownership beyond 25% indicates non-transparency. Panel A of Table 6 shows empirical results for anonymous and non-reported ownership in sample firms. Descriptive statistics for non-reported ownership reveal that 12.4% of sample firms report less than 50% of cash flow rights, 42.5% of firms do not report from 25% to 50%, and in just 45.1% of firms the level of nonreported ownership does not exceed 25% of equity. These results suggest frequent violations of disclosure requirements in Russian public companies as it is not plausible to explain the reported numbers only by the combined effect of free float and dispersed ownership. Table 6 also reports a high level of anonymous ownership. In 6.2% of sample firms anonymous owners directly and/or indirectly hold more than 75% of cash flow rights. In another 17.2% of firms the anonymous ownership constitutes from 50% to 75%. The most striking evidence comes from the cumulative effect of nonreported and anonymous ownership. In as many as 21.8% of public firms it exceeds 75% of equity. In a large proportion of companies, 48.7% of the sample, it lies in the interval from 50% to 75% of cash flow rights. I further examine the interrelation between non-reported and anonymous ownership and find that the nonparametric correlation coefficient between the two methods of reducing ownership transparency is negative (0.61) and significant at 0.01 level. The magnitude of correlation suggests that these methods are used as substitutes and, therefore, should be considered jointly to measure overall firm-level ownership transparency. Annual descriptive statistics over a sample period further support interrelation between non-reported and anonymous ownership (Panel B of Table 6). Empirical evidence shows that although the disclosure of ownership stakes is, on average, improving with time (perhaps due to the more effective regulatory monitoring of FCSM), the share of anonymous owners (nominees and offshore firms) is, on the contrary, tending to increase. As a result, the total level of non-transparent ownership in the company stays about the same. Finally, I document the frequency of various combinations of anonymous owners in public companies. These results are provided in Table 7. A strikingly large number of firms (84.8% of cases) has one or more Table 6 Summary statistics for non-disclosed and non-transparent ownership (435 firm-years, 2000–2002) The table documents non-reported ownership, anonymous ownership, and total non-transparent ownership as a sum of the two. Nonreported ownership is defined as [100%-sum of CF rights of disclosed direct blocks]. Anonymous ownership distributions by concentration of non-reported, anonymous, and total non-transparent cash flow rights. Panel B documents mean and median values for non-reported and anonymous ownership across three years of sample period. Non-reported ownership

Anonymous ownership

Total non-transparent ownership

Panel A. Distribution of sample firms by the volume of non-reported and anonymous ownership rights, % of firm-years Up to 25% of CF rights 45.1 41.4 3.0 From 25 to 50% of CF rights 42.5 35.2 26.5 From 50 to 75% of CF rights 11.3 17.2 48.7 Above 75% of CF rights 1.1 6.2 21.8 Total 100.0 100.0 100.0 Panel B. Distribution of non-reported and anonymous ownership by years, mean (median) % of CF rights 2000 32.51 (30.87) 28.35 (25.55) 2001 29.50 (27.86) 31.54 (26.86) 2002 26.00 (22.32) 36.86 (35.49) Total 29.33 (27.28) 32.25 (28.84)

60.86 61.05 62.86 61.59

(62.34) (60.98) (61.00) (61.39)

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anonymous owners in their control chains, and the average cash flow rights of anonymous owners in these firms are 38.02%. An absolute majority of sample firms, 56.8%, have at least one nominee at some level of ownership structure hierarchy. The median number of nominees in such companies is 3. Public companies with only foreign offshore firms in the role of anonymous owners are less common and constitute only 8.5% of observations. The median number of offshore owners in such companies is 2. Almost one fifth of sample firms have both nominees and foreign offshore holdings in their control chains, and their total number is about 4. Clearly, these companies are characterized by the highest complexity of non-transparent control chains. The mean value of cash flow rights controlled by anonymous owners in these traded firms is as high as 44.94% of equity, and the median is equal to 40.69% of equity. It is important to note that the relatively modest role of offshore owners among large anonymous owners may provide a misleading impression about the actual importance of these shareholders in the Russian corporate sector. Offshore structures are ideal for masking self-dealing transactions. Therefore, there is an incentive to split the controlling block among several offshores and to keep the size of each offshore-owned block below a certain threshold. Russian corporate law explicitly recognizes that any shareholder with more than 20% of voting rights may have incentives for self-dealing and mandates a special procedure for approving all deals that involve such shareholders. My further investigation of the average size of offshore blocks strongly supports their role in servicing self-dealing. As little as 3.6% of all blocks owned by offshore owners exceed the 20% threshold; the stake of an average offshore owner is 13.78%, and the maximum stake is only 32.88%. (These results are not reported in the table.) As discussed earlier, Djankov, La Porta, Lopezde-Silanes, and Shleifer (2008) construct anti-self-dealing indexes for 72 countries and report a large discrepancy between ex-ante and ex-post private control of self-dealing in Russia. My evidence shows that this discrepancy may be partially explained by low ownership transparency which masks the conflict of interest and transaction parties’ affiliation. In summary, the results suggest very low firm-level transparency of ownership structure in Russian traded companies that is ensured by substantial and typically multiple holdings registered under nominees and foreign offshore firms. The unobservable affiliation between these blocks adds to the obscurity of control chains and imposes limitations on the ability to estimate the actual level of ownership concentration. 5. Beyond official reports: informal ownership disclosure Do the market participants have at least some information about the identities of the anonymous ultimate owners? The revision of Russian business news reveals that investors are not completely in the dark. The oil company Sibneft, for example, has never disclosed its real owners, who were masked under multiple nominee accounts (see Fig. 1). However, in 2005, when the state-controlled gas monopoly Gazprom acquired a 72% share in Sibneft, the market ‘‘knew’’ that it was Mr. Abramovich who ultimately controlled Sibneft and sold Table 7 Anonymous ownership patterns: frequency, combinations, and the size of nominees’ and foreign offshore firms’ holdings (435 firm-years, 2000–2002) The table describes arrangements for anonymous ownership, including percentage of sample firms that have any combination of direct and indirect holdings of nominees and foreign offshores in their ownership structures, number of these anonymous owners by type, and corresponding cash flow rights. Anonymous owners in control chain

None At least one including Only nominee(s) Only offshore(s) Nominee(s) and offshore(s) Total

Firm-years

No. of anonymous owners in control chain

Total CF rights of anonymous owners (% of equity)

No.

%

Mean

Median

Mean

Median

66 369 247 37 85 435

15.2 84.8 56.8 8.5 19.5 100.0

– 3.0 2.8 2.7 3.9

– 3.0 3.0 2.0 4.0

– 38.02 36.79 30.36 44.94

– 35.10 32.23 26.62 40.69

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his stake to Gazprom.11 Similarly, the local market ‘‘knows’’ that Chelyabinsk Tube-Rolling Plant (Fig. 2) is ultimately controlled by management, while the Kirov Tire Plant (Fig. 3) is a part of a business group ultimately controlled by a foreign citizen. Where does this commonly shared ‘‘knowledge’’ come from? The detailed investigation of local sources reveals numerous channels of informal ownership disclosure. Real owners, for example, may voluntarily acknowledge the ownership of the controlling stake in publicly available interviews. Similar information may be provided by other insiders. Such acknowledgements do not have any legal power, thus allowing controlling shareholders to mitigate the costs of anonymous ownership and, at the same time, to avoid any responsibilities and self-dealing limitations imposed by formal disclosure. The recent history of privatizations, acquisitions, corporate conflicts, and hostile takovers is another source of information for detecting real owners. In particular, the methods and the administrative resources used by the parties in corporate conflicts provide a rich dataset for local market analysts who became experts in reading the map of political connections in Russia. Public firm affiliation with certain business groups and vertically-integrated holding structures are also easily observable through their business activities and can further shed light on the real owners’ identities. Finally, official voting results from the general shareholders’ meetings, and the structure and personalities of the management board and the board of directors, may add important clues. All elements of informal ownership disclosure described above are closely watched, interpreted, and aggregated by numerous local business news agencies and market experts on a daily basis. The overall picture of ‘‘who owns what’’ can be derived from this monitoring process. In general, when the risks of minority shareholders’ expropriation are high, the market cannot function in an informational vacuum in regards to the identity of the controlling owner. All market participants have strong incentives to reduce this information asymmetry. The larger and the more actively traded the company, the more closely it is monitored, and the more difficult it is to conceal the ultimate owners’ identity from the public. 5.1. Who are the real owners? To identify anonymous ultimate owners, I perform a systematic search of publicly available information. The credible sources are selected based on the Quality Rating of Business Press issued by the Russian Managers Association in 2003.12 Based on availability, I search archives of five of the top ten daily periodicals for the analysts’ estimations on who ultimately controls each sample firm in each sample year. These daily periodicals are Commersant Daily, Vedomosti, Vremya Novostey, Rossiyskaya Gazeta, and Nezavisimaya Gazeta. The supplementary sources are electronic archives of the leading Russian information agencies, such as RBC Daily, Finmarket, and AK&M. I document the following seven categories of the real ultimate owners: (1) federal government, (2) regional government, (3) management (CEO, Chair, or top management group), (4) private outsider, (5) foreign investor, (6) majority control is not consolidated, (7) no information. I assign each of 435 sample firm-years to one of the first six categories only if I can find at least three expert opinions and if all experts agree on who ultimately controls the firm. Otherwise, I classify the case as ‘‘no information.’’ Table 8 reports the results of this investigation by comparing formally and informally disclosed identities of the ultimate owners. Formal ultimate owners are at 25% threshold of total voting rights. The most striking result is that the market ‘‘knows’’ real ultimate owners in as many as 90.1% of sample firm-years. For another 6% of observations, experts agree that the majority control is not consolidated yet. For the remaining 3.9% of firm-years I either could not find any information or the experts admit that they have no clue who the real owners are. Table 8 shows that the officially disclosed ultimate control by federal and regional governments closely coincides with the market estimations. Based on the analysts’ opinions, 46.4% of sample firms are ultimately controlled by the federal government, and another 7.6% are controlled by the regional governments.13 11

See, for example, ‘‘Investing in Russia’’ (Financial Times, October 11, 2005, p.5). Source: http://www.amr.ru/pdf/reyting_SMI_2003.pdf 13 There are, however, 15 cases where the formal and informal disclosure estimates of state control rights are different. In particular, formal ownership disclosure and 25% cut-off suggest that the federal or regional government is an ultimate owner; however, the market 12

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Table 8 Comparison of formally and informally disclosed ultimate owners (435 firm-years, 2000–2002) The table documents cross-tabulation of reported and real ultimate owners. Officially reported ultimate owners are at 25% threshold of the total voting rights. Real ultimate owners’ identities are based on the local experts’ estimations. The expert opinions for each sample firm-year are hand-collected from archives of reputable local periodicals: Commersant Daily, Vedomosti, Vremya Novostey, Rossiyskaya Gazeta, and Nezavisimaya Gazeta. Ultimate owners: formal disclosure

Ultimate owners: informal disclosure Federal government

Federal government Regional government Nominee Offshore Implied Individual Private firm Foreign Widely held at 25% Total % of sample

Regional government

Management

202 33 18 3 3 3 4

202 46.4

33 7.6

28 59 13.6

Outsiders

3 4 43 6 3 2 19 80 18.4

Foreign

4 2 4

Control is not No informa- Total conso-lidated tion 4 3 9

1 1 2 3 2

3 5 18 4.1

3 7 26 6.0

8 17 3.9

209 41 75 7 16 6 8 6 67 435 100

The two primary classes of private ultimate owners are domestic outsiders (18.4% of sample firms) and management (13.6% of firms). Foreign investors control only 4.1% of Russian traded companies. Further examination of sample firms controlled by outsiders reveals that 88.7% of these firms are essentially daughter companies and that the most typical ‘‘outside’’ ultimate owners are top managers of the parent company. Table 8 also reports that more than three-fourths of companies that seem to be widely held at 25% threshold of officially disclosed voting rights are, in reality, majority-controlled by the private owner. This evidence further suggests that the controlling stake can be sliced into relatively small, formally independent blocks to imitate a widely held public firm. Collectively, my results reveal that the identities of the controlling shareholders of the traded Russian companies appear to be an open secret due to the combined effects of voluntary informal disclosure, information leaks, and the scrutiny of market participant monitoring. Therefore, it is reasonable to assume that in almost all cases the regulators ‘‘know’’ the identities of the actual owners. However, this knowledge does not have any juridical power. The design of anonymous control chains may utilize a wide variety of arrangements, such as nominee accounts, foreign offshore holdings, split blocks, non-traceable private firms, shell firms, and even nominal individuals. Clearly, such arrangements enormously complicate any official investigation. From the investors’ point of view, the usefulness of informal disclosure is also limited as it neither completely eliminates uncertainty about the real controlling owners nor protects minority shareholders from expropriation. 5.2. Ultimate control type and the size of the firm I further investigate the relative importance of state and private control models in Russian publicly traded companies by comparing firm size characteristics across ultimate owners’ types. My main proxy for firm size is annual sales. Because of the low liquidity of the Russian stock market, the reliable firm market value is available for a limited number of public companies. In particular, the RTS methodology requires at least ten (footnote continued) believes that the actual ultimate owner is an outsider (7 cases), control is not consolidated (7 cases), or the ultimate owner is unknown (1 case). I check the average state voting rights in all of these cases. The mean is only 29.0% and the maximum is 45.1%. These numbers clearly leave room for the existence of another large owner.

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transactions with a firm stock in the last three months of the year to determine its year-end price. As few as 79 firm-years in my sample satisfy this criterion. They represent ‘‘blue chips,’’ the largest and most liquid traded companies that account for about 98% of the total market capitalization in Russia. Indeed, low liquidity and the dominance of a handful of large ‘‘blue chips’’ are the distinct features of the Russian stock market. For completeness, I report size measures for formally and informally disclosed ultimate owners’ types. Panel A of Table 9 describes firm size characteristics across ultimate owners traced through official disclosure reports. Panel B reports identical statistics across the actual ultimate owners as detected by the informal disclosure channels. Panel C compares mean and median firm size values between state-controlled and privately-controlled firms. As reported in Panel A, based on formally disclosed ownership, state-controlled companies collectively account for 50.8% of sample sales, anonymously controlled companies for 26.5%, and the widely-held public firms for 21.6%. The sales share of firms controlled by all other formally reported ultimate owners is negligible (1.1%). The ultimate owners classification based on informal ownership disclosure, however, provides a different layout. Panel B of Table 9 shows that state-controlled and privately-controlled companies account for a relatively equal sales share: 49.6% versus 47.4% respectively. Notably, the largest private firms are management-controlled and account for 31.1% of sample sales. Descriptive statistics in Panel B also help resolve a puzzle concerning the unexpectedly large size and share of widely-held firms reported in Panel A. Apparently, the actual number of firms that lack an ultimate owner (‘‘control is not consolidated’’ category) is much smaller, and their sales share is only 2.2%. This implies that some large private owners slice their controlling stakes into several formally independent blocks. Panel C shows that a comparison of mean and median values for state- and privately-controlled firms does not reveal any statistically significant differences in their annual sales. Overall, the evidence suggests that in terms of sales, the size of the state-controlled companies is comparable to the size of anonymously (and privately) controlled traded companies. Table 9 also displays market capitalization statistics for a subsample of 79 firm-years with liquid stock. Among the ‘‘blue chips,’’ the role of firms controlled by private owners seems to be more pronounced than the role of state-controlled firms. Based on market analysts’ estimations, state-controlled companies account for 23.1% of sample market capitalization, while privately-controlled companies account for 76.0%. This result is driven by the presence of a few very large privately-controlled ‘‘blue chips.’’ The largest firms in terms of market capitalization are ultimately controlled by the management. They account for 63.6% of the sample market value of firms with liquid stock. These estimations may explain why, in spite of the substantial presence of state-controlled companies, it is commonly believed that the Russian stock market is dominated by firms ultimately controlled by private insiders. Although the number of the management-controlled firms in the total number of publicly traded companies is not large (13.6% of the sample), they tend to be visible in terms of their liquidity, size, and market capitalization. Firms controlled by foreign investors and firms for which I could not find consistent analysts’ ownership estimations tend to be the smallest in the market. The latter observation implies that the market participants have higher incentives and/or more readily available hints to reveal and track corporate control structures in large and important companies. Overall, the informal disclosure results in Table 9 support that the ultimate ownership of Russian traded companies is concentrated in the hands of the two major owners’ types—the state (mostly federal government) and anonymous private owners (mostly insiders). The size and share of widely held companies and companies with other types of ultimate owners are negligibly small. 5.3. Is corporate ownership in Russia unique? International comparison Table 10 compares the frequency of state and family (or individual) ultimate control in public companies across several emerging markets. The selection of countries for a cross-country comparison is based on Shleifer and Treisman’s (2005) reasoning. In the discussion paper ‘‘A Normal Countryy’’ they argue that Russian economics and politics in general and corporate ownership structures in particular are not unique compared to other economies with similar levels of economic and political development. Specifically, they

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Table 9 Firm size and ultimate owners’ types The table shows sales and market capitalization statistics for sample firms across formally (Panel A) and informally (Panel B) disclosed categories of the largest ultimate owners. Annual sales data are from the FCSM disclosure reports. Year-end market capitalization is the market value of common and preferred stock. Due to the low liquidity of the Russian stock market, it is calculated only for firm-years with at least ten deals in the last three months of a year (Russian Trading System methodology). Panel C reports statistics for differences of group means (t-test) and medians (Wilxocon rank-sum Z-test). Asterisk indicates significance at the 1% (***), 5% (**), or 10% (*) level. Ultimate owner

All firm-years No. of firm-years

Firm-years with liquid stock

Sales (US$ million) Mean

Share of sample sales (%)

No. of firm-years

Median

Panel A. Formal ownership disclosure: ultimate owners at 25% threshold of voting rights State 250 363 121 50.8 44 Federal government 209 348 117 40.7 40 Regional government 41 439 160 10.1 4 Anonymous private 98 482 109 26.5 23 Nominee 75 561 151 23.6 18 Offshore 7 114 75 0.4 3 Implied 16 278 31 2.5 2 Other private 20 97 55 1.1 1 Individual 6 145 127 0.5 0 Private firm 8 95 30 0.4 1 Foreign firm 6 53 52 0.2 0 Widely held at 25% Total

67 435

576 410

Market cap. (US$ million)

Share of sample mkt cap. (%)

Mean

Median

836 819 1,000 2,998 3,743 39 730 9

298 280 1,009 372 376 32 730 9

23.7 21.1 2.6 44.3 43.3 0.1 0.9 0.0

9

9

0.0

92 109

21.6 100.0

11 79

4,519 1,968

1,244 379

32.0 100.0

Panel B. Informal ownership disclosure: market analysts’ estimations State 235 376 121 Federal government 202 355 118 Regional government 33 507 160 Private 157 539 107 Management 59 940 161 Outsiders 80 356 149 Foreign 18 39 43 None or unknown 43 125 58 Control is not consolidated 26 152 71 No information 17 84 48 Total 435 410 109

49.6 40.2 9.4 47.4 31.1 16.0 0.4 3.0 2.2 0.8 100.0

43 39 4 31 17 14 0 5 4 1 79

833 816 1,000 3,812 5,817 1,377

292 269 1,009 706 3,797 550

23.1 20.5 2.6 76.0 63.6 12.4

286 230 513 1,968

356 234 513 379

0.9 0.6 0.3 100.0

2.53**

0.24

3.45***

1.49

Panel C. Statistics for differences of group means (t-statistic) and medians (z-statistic) Formal disclosure 0.89 0.61 State vs. Anonymous Informal disclosure 1.34 1.00 State vs. Private

suggest comparing Russia which has a GDP per capita around $8,00014 at purchasing power parity with other middle-income economies. In general, corporate governance systems in emerging markets are characterized by concentrated ownership, weak investor protection, and minority shareholders expropriation. The existing literature on ultimate ownership in the middle-income countries also agrees that large firms are either state or family controlled. In regard to these features, Russian corporate governance is clearly not unique. In regard to specific control 14

This figure is indicative of the period 2000–2002. As of 2005, the Russian GDP per capita (PPP) was around $11,000.

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Table 10 State-controlled versus family-controlled publicly traded firms in selected middle-income countries The table compares the frequency of state and family control in the middle-income countries for which ultimate ownership data are available from prior empirical studies. The countries are defined as middle-income by the World Bank classification of economies based on the 2002 gross national income per capita. The sources of the ultimate ownership data are as follows: Argentina and Mexico from La Porta, Lopez-de-Silanes, and Shleifer (1999, Table 2); Malaysia, Philippines, Thailand from Claessens, Djankov, and Lang (2000, Table 6); Brazil, Chile, South Africa, Turkey from Lins (2003, Table 3); Russia: this study, 2002 sample year. Country

Year

No. of firms

State control, % of firms

Family and individuals control, % of firms

Argentina Brazil Chile Malaysia Mexico Philippines South Africa Thailand Turkey Russia Formal disclosure Informal disclosure

1996 1995 1995 1996 1996 1996 1995 1996 1995

Top 20 59 30 238 Top 20 120 96 167 28

15 15 0 13 0 2 0 8 18

65 54 83 67 100 45 58 62 50

2002 2002

145 145

57 53

3 34

arrangements, however, Russian public firms exhibit unique ownership characteristics. The unusually high percentage of traded companies indirectly controlled by the state, combined with the low transparency of family control, make up a distinctive corporate governance environment. To facilitate cross-country comparison, I focus on the last sample year. Although it may seem that only 3% of my sample firms in 2002 were controlled by families and individuals, the actual frequency of this type of private control is at least onethird of traded companies (Table 10). The existence of two parallel ownership structures in almost every company—one formally disclosed for regulators and another one informally disclosed for the market participants (or by the market participants)—further adds to the uniqueness of ownership arrangements in Russian corporations. Evidence in Table 10 shows that Russia has the largest proportion of state-controlled traded companies among all other countries with similar levels of economic development. It should be noted, however, that the degree of state participation in listed companies cannot be generalized to the degree of state participation in all other Russian companies. As described in the data section, publicly traded companies in Russia tend to be large and concentrated in a few strategically important industries. As for the rest of the economy, no data are available to trace control chains and to estimate the actual involvement of the state. Official statistics account only for federal level direct shareholdings and, therefore, can be misleading. In the case of anonymous ownership, the macroeconomic evidence strongly suggests its wide presence in the Russian corporate sector. Specifically, official statistics recognize a notable role of foreign investments that originate from the world’s offshore centers. According to Russian Federal Government Statistics Agency, by July 2005 Cyprus was the absolute leader in terms of the accumulated investment in Russia ($17,305 million). Luxemburg ranked second ($15,361 million). The Virgin Islands entered the top-ten of investors ($1,636 million) as well. In almost all cases, this was originally Russian capital. 6. Conclusions Anecdotal evidence suggests that Russian corporations have distinctive ownership structures. The country’s corporate laws allow anonymous ownership through nominee accounts and foreign offshore firms. Because these blockholders are not required to disclose beneficiaries, the ultimate owners can build obscure control chains and mask their controlling stakes under knotty webs of anonymously owned blocks. Another widely debated topic is the actual degree of state participation in the Russian public companies. This study is the first systematic attempt to trace obscure control chains and to provide empirical evidence on ultimate ownership in

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modern Russia. By relying on a unique hand-collected dataset, I develop the methodology for tracing ownership structures of low transparency and reveal multiple masked affiliations. The in-depth examination of formal and informal ownership disclosures reveals that Russian traded companies are majority-controlled either by the state or by anonymous private owners. For state ultimate ownership, I find that not only federal, but also regional governments participate extensively in Russian traded companies through control-enhancing arrangements like pyramids and golden shares. For private ultimate ownership, control arrangements include anonymous holdings of insiders and intentional splitting of large stakes into formally independent small holdings. Ownership structures that lack both transparency and effective outside monitors, such as institutional and foreign strategic investors, provide a framework for explaining the major weaknesses in the Russian corporate governance system. The study confirms the importance of the legal determinants of country-specific ownership structures and reveals that legal loopholes may completely undermine the formally adequate restrictions on self-dealing and affiliated parties’ transactions. References Black, B., 1998. Shareholder robbery, Russian style. Institutional Shareholder Services, ISSue Alert, 3–14. Black, B., Kraakman, R., Tarassova, A., 2000. Russian privatization and corporate governance: what went wrong? Stanford Law Review 52, 1731–1808. Blasi, J., Kroumova, M., Kruse, D., 1997. Kremlin Capitalism: Privatizing the Russian Economy. ILR Press, Ithaca, NY. Bortolotti, B., Faccio, M., 2004. Reluctant privatization. ECGI working paper No. 40/2004. Claessens, S., Djankov, S., Lang, L., 2000. The separation of ownership and control in East Asian corporations. Journal of Financial Economics 58, 81–112. Coffee, J., 1999. Privatization and corporate governance: the lessons from securities market failure. Journal of Corporate Law 25, 1–39. Djankov, S., La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2008. The law and economics of self-dealing. Journal of Financial Economics in press, doi:10.1016/j.jfineco.2007.02.007. Filatochev, I., Wright, M., Bleaney, M., 1999. Privatization, insider control, and managerial entrenchment in Russia. Economics of Transition 7, 481–504. Johnson, S., Shleifer, A., 2001. Privatization and corporate governance. In: 12th Annual East Asian Seminar on Economics. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., 1998. Law and finance. Journal of Political Economy 106, 1113–1155. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 1999. Corporate ownership around the world. Journal of Finance 54, 471–517. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., 2000. Investor protection and corporate governance. Journal of Financial Economics 58, 3–27. Lins, K., 2003. Equity ownership and firm value in emerging markets. Journal of Financial and Quantitative Analysis 38, 159–184. Pistor, K., Raiser, M., Gelfer, S., 2000. Law and finance in transition economies. Economics of Transition 8, 325–368. Shleifer, A., Treisman, D., 2005. A normal country: Russia after communism. Journal of Economic Perspectives 19, 151–174. Slavova, S., 2000. Law and Finance in Transition Economies. Unpublished working paper. London School of Economics and Political Science.