The October 24 conference Medium Business: Issues and Outlook for Raising Capital in Smolensk was organized by the Smolensk Regional Administration, the Regional Office of the Federal Financial Markets Service, the National Institute for Corporate Reform (NICR) and Securities Market magazine. Acron Holding sponsored the event and sent its president, Ivan Antonov, to take part in the Conference.
More than 100 top managers from the metallurgical, chemical, machine-building, agricultural, and food industries representing ten regions of Russia, as well as representatives from RTS and MICEX, federal and regional officials, scientists, members of business associations and think tanks and executives of major investment companies attended the conference.
Participants discussed the issues of growing medium businesses, creating conditions for fair competition and fighting monopoly trends in the commodity markets.
Vladimir Milovidov, chairman of the Federal Financial Markets Service, opened the conference by pointing out that the very businesses many see as “second class” actually represent the vast untapped potential of the Russian financial market. If Russia can tap into this potential, it will strengthen its position among the increasingly competitive global financial centres.
The Conference highlighted the need for increasing the role of medium business in Russia’s economic growth. Participants analysed the problems that currently impede development in the medium business segment. In particular, speakers expressed concerns regarding the policies of industry-specific and local monopolies that supply feedstock and transport services. These monopolies raise their prices and force industrial consumers to accept unfavourable supply conditions. Smolensk Governor Victor Maslov spoke harshly about monopoly policies. According to Maslov, abuses by monopolies trigger inflation, causing prices on groceries and other basic items to soar. Maslov stressed that monopolists’ actions adversely affect the development of regional businesses. In particular, he focused on JSC Apatite, which has repeatedly sabotaged apatite concentrate deliveries to one of the region’s major plants, JSC Dorogobuzh, interrupting its operations.
The delegates expressed their disapproval of the trend for monopolies to sell their products through commodity exchanges. In particular, this has affected natural gas, apatite concentrate, potassium chloride and cement. Conference participants stated that monopolies use these exchanges as a way to abuse their market dominance. Acron’s Antonov stated in his speech that “Commodities exchanges are no place for monopolies. That distorts the whole essence of commodities exchanges as an organized free market open to many buyers and sellers. In the hands of monopolies, commodities exchanges are not a market tool. This is just a convenient way for them to manipulate supply and prices given the lack of any control by anti-monopoly bodies.”
On the topic of commodities exchanges in the energy and mineral resources sectors, NICR research curator Alexander Dynkin stressed that in the existing market environment such exchange operations send misleading information and artificially raise prices. Dynkin called on the government to outlaw “stock exchange schemes” by monopolies. He compared such schemes with the “grey” payroll schemes operated by dishonest insurance companies.
Roman Goryunov, who chairs the RTS board, was also tough on the monopolies. “When a commodity is regulated by a monopoly, a free exchange market can not offer a fair price, no matter what techniques are applied. In this situation, the state has to control monopoly pricing.”
After the talks, participants drew up a number of constructive initiatives aimed at limiting the dominance of monopolies. In particular, they suggested restricting monopolies’ access to exchange market vehicles. Conference participants emphasized that the Russian Federal Antimonopoly Service must control monopoly pricing in order to prevent unfounded price jumps.
Conference participants and organizers issued an open letter to legislative and executive bodies requesting an efficient resolution of the problems facing mid-sized companies. Participants drew up specific proposals for measures in the area of state, public and corporate monopoly regulation. In particular, the Conference concluded that antimonopoly regulatory bodies must be more active in preventing unfair trade practices. Further, customs and pricing regulations must be applied more effectively to protect the domestic market from shortages of monopolists’ commodities. The regulatory system is to be preserved and improved in the markets for goods and services offered by natural monopolies.
List of Conference Speakers:
Victor N. Maslov, Governor of the Smolensk region
Vladimir D. Milovidov, Head of the Federal Financial Markets Service
Ivan N. Antonov, JSC Acron President
Vladimir V. Kachalin, Advisor to the head of the FAS
Alexey E. Rybnikov, MICEX General Director
Roman Goryunov, Chairman of RTS board
Evgeny B. Kogan, AntantaPioglobal CEO
Alexander A. Dynkin, Fellow of the Russian Academy of Sciences, NIKR Research Curator
Vladimir V. Gerasimov, First Deputy General Director, Interfax news agency
Alexey A. Sololov, Director for economic sector development sector of the Russian Ministry of Economic Development and Trade
Alexander N. Rasskazov, Deputy Director for agricultural policy and rural development department of the Russian Ministry of Agriculture
Alexander G. Islamov, LLC Arcada-Engineering General Director
Nikolay V. Tsarev, FGUP Rosoboronexport Representative for the Smolensk region
Conference organizers: Smolensk Regional Administration, the Regional Office of the Federal Financial Markets Service, the National Institute for Corporate Reform (NIKR) and Securities Market magazine.
Conference attendees: top managers of medium businesses, RTS and MICEX representatives, governmental and regional officials, scientists, members of business associations and think tanks, securities market professionals.
Proposals from conference participants and organizers aimed at developing medium businesses, ensuring fair competition and fighting the dominance of monopolies:
The Conference discussed the role of Russia’s second-tier companies as leaders in social and economic development, international trade promotion and the modernization of Russia’s infrastructure. Medium businesses account for more than half of the country’s industrial output. They have a growth rate of 10-11% per annum, %50 higher than annual GDP growth. Mid-sized companies can point to a successful a track record of optimizing their corporate governance, improving transparency, streamlining marketing procedures and entering global markets.
Conference organizers and delegates share the conviction that medium businesses can and must contribute to improving Russia’s competitive edge in an environment of fierce globalization and competition. Russian medium businesses offer vast, so far untapped opportunities.
Today, medium businesses are focused on switching to investment- and innovation- driven growth. They may be able to make the transition using capital-raising tools (shares, bonds, equity and venture investments). Unless they manage to change their strategy, mid-sized companies will be in no position to upgrade their infrastructure, capitalize on state-of-the-art technologies and join the knowledge economy.
As they make their way forward, medium businesses are facing a number of obstacles, including legislative gaps and weak enforcement, as well as dominance by monopolies and unfair competition. Strategic investment programs are in jeopardy due to the imprudent policies of the natural and local monopolies who supply energy, feedstock and transportation services, and which unilaterally impose arbitrary limits or cut supplies. These monopolies use their dominant position to generate excessive profits by forcing their conditions and prices on industrial consumers who do not have their own resource base. Such actions do not bode well for the country’s economic development objectives.
Applied systematically, these practices put a strangle-hold on medium businesses, especially processors in the metallurgy, chemical, construction and wood product sectors. Conference participants and organizers called on legislative and executive bodies to find solutions to the problems faced by mid-sized businesses.
Conference participants and organizers propose the following initiatives to mitigate the adverse effects on Russian industry of price and rate liberalization reforms lobbied by natural and local monopolies, as well as attempts by dominant mineral resources suppliers to wrest their prices free from state control:
• Preserve the system of state regulators in the markets for goods and services offered by natural monopolies after their restructuring; ensure the efficiency of antimonopoly regulators and courts in this field.
• Antimonopoly bodies should exercise their mandate to divide monopolists into several independent entities to prevent their unfair dominance and promote competition in the commodities markets.
• The state must play a more active part in regulating foreign trade, including export customs regulation of monopolist’s goods to prevent a deficit of these goods on the domestic market.
• The term “industrial consumer” should be defined in antimonopoly legislation, giving this group direct, unrestricted assess to goods in the form of direct purchases from monopoly manufacturers.
• Companies that dominate the market for certain goods should be prevented from using commodities exchanges by the institution of cap quotes for such sales.
• If exchange mechanisms are used to set fair market prices for certain goods, these mechanisms should take into account the interests of both users and manufacturers; trade sessions must be arranged in the form of a double auction, provided that there are at lease five manufacturers and at least ten users in the market for the goods.
Corporate and public regulation:
• Share issues by joint stock companies that dominate certain commodity markets should be subject to a mandatory public subscription requirement that includes industrial consumers of the companies’ output.
• The law on joint stock companies should stipulate that when a joint stock company dominates certain commodities markets, industrial consumers must be represented on its board of directors.
• Companies that are not public joint stock companies should be statutorily transformed into public joint stock companies if they dominate certain commodities markets; in addition, mandatory quotes should regulate their share float in the market.
• For joint stock companies that dominate certain commodities markets, representatives of their industrial consumers should be allowed to vote on issues of sales policies (marginal prices, supply volume) at board or shareholder meetings.
• If a joint stock company is the sole manufacturer of a certain commodity, a new member category called “stakeholders” should be added to its shareholders. The stakeholder will have rights similar to those of shareholders in determining the company’s sales polices, but will not manage the company’s business or participate in its profit.
• Where required, stakeholders or buyers committees should be formed in joint stock companies that dominate commodities markets. Such committees would give equal representation to the company’s consumers, who would have the right to approve sales policies.
• In certain cases, there should be a procedure for the mandatory spin-off of the sales divisions of joint stock companies that dominate commodities markets. These sales divisions should be reorganized as joint stock companies (or not-for-profit partnerships) with equal interest (or representation) held by the companies’ consumers.
Measures to encourage medium businesses into the stock exchange:
• Develop an infrastructure for notifying medium businesses about stock exchange opportunities. State regulators should be more active in this field on a regional level.
• To facilitate entry to the stock exchange, the Development Fund for the Central Federal Region should develop a program to reimburse a portion of coupon payments on regional issuers’ bonds.
• Develop and implement a state program to increase small- and mid-sized businesses’ understanding of the stock exchange and its tools; establish centres providing professional consultations on entering the stock exchange.
• Promote increased public awareness of investment tools and interest in the stock exchange; promote stock instruments as a saving and investment tool.