US embassy cable - 05MINSK1383

UNCLAS SECTION 01 OF 02 MINSK 001383 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
PASS USTR FOR ALLGEIER AND DWOSKIN 
EB/OT FOR CRAFT 
USDOC FOR ITA/JACOBS 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, PGOV, WTRO, BO 
SUBJECT: Re-Nationalization of Industry Continues 
 
Ref: Minsk 955 
 
1. (SBU) Summary: Reftel describes how the GOB has been using the 
Golden Share to nationalize a number of companies.  Over the summer 
the GOB invoked the Golden Share to take temporary control of 
several firms.  The GOB then ordered these companies to issue large 
numbers of severely undervalued shares and grant all the new shares 
to the GOB, thereby gaining a majority stake in each.  In the past 
month the GOB has streamlined this process by getting several 
companies to give a majority stake to the GOB without the Golden 
Share being invoked.  The GOB has taken control of several 
companies in the past month through this mechanism.  Even though 
the GOB has found new means to further nationalize the economy 
while avoiding the infamous Golden Share, on October 19 Lukashenko 
signed a decree strengthening the government's powers under the 
Golden Share.  End summary. 
 
 
The New, Improved Golden Share 
------------------------------ 
 
2. (SBU) On October 19, Lukashenko signed decree 486, strengthening 
the GOB's authority under the Golden Share.  The decree states that 
henceforth any decisions made by the GOB after it has invoked the 
Golden Share are, "indisputable and not subject to appeal... 
irrespective of the established procedure of approving decisions." 
In other words, whatever the GOB says, goes, even if it violates 
the Golden Share law. 
 
3. (SBU) The GOB created the Golden Share law in 1997 to allow the 
state to take over management of companies in certain 
circumstances.  In 2004, Lukashenko issued a decree allowing the 
GOB to take over temporary management of any company in which the 
GOB at any time in the past owned even one share.  Although the law 
states the Golden Share can only be used in certain circumstances 
(such as after a company fails to pay wages for three months, or is 
operating at a loss for six months), in practice the GOB has used 
the Golden Share to nationalize a number of companies who do not 
have such problems.  The GOB uses the Golden Share to take over 
temporary management of the company, then orders the company to 
issue vast amounts of highly undervalued shares, and to give those 
shares to the GOB. 
 
 
Coercion as Effective as the Golden Share 
----------------------------------------- 
 
4. (SBU) The GOB has found ways to gain control of companies 
without using the Golden Share.  On September 22, Lukashenko signed 
Presidential Decree 442, giving the GOB majority ownership of the 
Minsk Porcelain Plant.  Previously, the state owned 9% of the 
plant, with the other 91% owned by 1,680 individuals (most likely 
plant employees).  The decree ordered the plant to give 2,267,888 
shares to the GOB and another 350,995 shares to Minsk city 
authorities.  This gave the GOB 95% ownership of the company. 
These new shares were valued at BYR 500 [USD 23 cents] each.  In 
exchange for these shares, the GOB agreed to reschedule the plant's 
debt and give the plant BYR 1.39 billion [USD 646,500] from the 
state budget to modernize.  In his decree Lukashenko also ordered 
the plant to produce 2.7 million pieces of porcelain in 2005. 
 
5. (SBU) On October 6, the GOB announced it was raising its stake 
in Kovry Bresta (Brest Carpets) from 0.003% to 99.73% in exchange 
for relief of BYR 15.694 billion [USD 7.3 million] in debt the 
company owed the GOB.  The GOB forced the company to issue new 
shares worth BYR 130 [USD six cents]; previously its shares were 
worth BYR 80,000 [USD 37] and the company was owned by its 2,400 
employees. 
 
6. (SBU) On October 12, the GOB convinced shareholders at the 
Svetlogorsk paper mill to issue 1,447,525 new shares, valued at BYR 
12,000 each [USD 5.58], and to surrender these new shares to the 
GOB.  This raised the GOB's share in the paper mill from 47.23% to 
75.95%.  In exchange, the GOB promised to invest in modernizing the 
mill.  This new emission of shares reduced the stake of the mill's 
other owners: Russian companies Damino Associates, Bushnell Co. and 
Iton Association had their shares drop from 14.04% to 6.4%, 13.92% 
to 6.3% and 11.61% to 5.3%, respectively.  Individual shareholders 
saw their stake drop from 12.4% to 5.66%. 
 
MINSK 00001383  002 OF 002 
 
 
 
7. (SBU) On October 20, Presidential Decree 482 gave Belarus' 
fourth largest bank, Belinvestbank, the status of an "investment 
bank" and ordered the bank to issue BYR 50 billion [USD 23.25 
million] worth of new shares and give them to the GOB.  The decree 
also instructed the GOB to give the bank USD 10 million a year for 
the next six years, and directed the bank to loan at least an 
additional USD 100 million to state investment projects during the 
same period.  Before this decree, various GOB entities owned 84% of 
the bank, with the National Bank of Belarus owning 41.7%, and the 
Ministry of Economy and Belarusian State University each also owing 
major portions.  After the BYR 50 billion in new shares, the GOB 
will own 92%. 
 
8. (SBU) In January 2005, the GOB used the Golden Share to take 
temporary control of the company Mozyr Refinery Plus (MNPZ).  MNPZ 
was created in 1995 when the Mozyr Oil Refinery was privatized.  It 
has never been state owned, and therefore the Golden Share could 
not be legally used against MNPZ.  MNPZ consists of 2,235 current 
refinery employees and 700 retirees, and owns 12.252% of the Mozyr 
Refinery (the GOB owns 42.757% and Russia's Slavneft owns 42.581%). 
After the GOB invoked the Golden Share against MNPZ, it tried to 
transfer 98% of the company to government ownership, claiming MNPZ 
owed the GOB USD 4.7 million.  MNPZ asked permission to sell 4% of 
its shares, worth an estimated USD 5 million, to cover this debt, 
but the GOB (which manages the company since it used the Golden 
Share) refused.  MNPZ members have repeatedly challenged the use of 
the Golden Share in court, claiming it was used illegally since the 
GOB never owned a single share of the company.  In each case the 
court has refused to hear the case.  If the GOB succeeds in taking 
over the company, it will control a majority of the Mozyr refinery. 
 
 
Golden Share Scares Away Investment 
----------------------------------- 
 
9. (SBU) On October 27, Econoff met with Frank ter Borg, Economic 
and Commercial Counselor for the Dutch Embassy in Warsaw (with 
jurisdiction over Belarus).  Borg explained that recently an 
unnamed Dutch company had wanted to invest up to Euro 20 million in 
a production facility in Belarus.  However, as the facility would 
have been built on land that was once a state-owned collective 
farm, the company asked the Belarusian MFA if that meant the Golden 
Share could be used to take control of the facility.  The MFA never 
responded, so Borg said the Dutch firm decided not to invest in 
Belarus. 
 
 
Comment 
------- 
 
10. (SBU) Comment: The GOB continues to use the Golden Share and 
similar means to re-nationalize the few parts of the Belarusian 
economy that were privatized.  In the immediate term this 
aggressive policy is boosting state revenues and promoting state 
social policies, such as full employment.  However, such practices 
will further weaken the Belarusian economy by expanding the share 
of the economy ruled by state command, scaring off needed 
investment, and complicating Belarusian efforts to join the WTO. 
 
KROL