Section 3: Analysis of the Content of the Third Order Codes
3.1 Third Order Codes (Disputes)
3.1.5 Transactions with Self-Interest
This category views corporate disputes from the perspective of interested parties.
It includes practices such as transfer pricing, insider dealing, assets stripping, appraisal of assets and share dilution. However, the main focus of the analysis is on the alleged identity of benefiting parties. Here association with second order codes demonstrates whether such self-centred actions were limited to a straightforward diversion of funds or, in more extreme cases, led to noticeable changes in ownership structure and levels of control.
In 1998 there were 55 disputes97 with elements of the above category. This is the biggest third order code in the study. It is not surprising since very often corporate conflicts are fuelled by self-centred actions of the stakeholders involved98. In 1998 a vast majority of reported disputes were under the hierarchy of the diversion of claims code. However, control and ownership codes were also visibly represented in the graphical representation of the reported material (see graph 4.24 and table 4.11).
97 43 individual disputes of which 12 were parallel coded.
98 Agency theory
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Graph 4.24: Transactions with Self-Interest Disputes, 1998
Table 4.11: Transactions with Self-Interest Dispute, 1998
Company Benefiting Party Nature of the
Transactions Template Details
Appendix 9a Aeroflot 1 Article, ref. 1
Coding: Diversion of Claims
Majority shareholder (Boris Berezovsky)
Insider dealing
MGTS 4 Articles, ref. 3
Coding: Diversion of Claims
AO Sistema (a secretive outfit with links to Yury Luzhkov)
Share dilution
VimpelCom 2 Articles, ref. 4
Coding: Control
First Deputy Prime Minister Yury Maslyukov
Insider dealing
AvtoVaz 1 Article, ref. 6
Coding: Diversion of Claims
Criminal dealerships Insider dealing
KamAz 2 Articles, ref. 8
Coding: Diversion of Claims
Majority shareholders Share dilution
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Company Benefiting Party Nature of the
Transactions
Gazprom managers Appraisal of assets
Gazprom 1 Article, ref. 11. 7
Diversion of Claims
Management of Gazprom Insider dealing
Yukos
Directors of Yukos Share dilution
Yukos
Menatep Group Share dilution
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Company Benefiting Party Nature of the
Transactions
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Company Benefiting Party Nature of the
Transactions one of the contenders for the CEO position).
Majority shareholders Share dilution
Norilsk Nickel
Ordinary shareholders Share dilution
Novolipetsk 3 Articles, ref. 29.2
Parallel Coding: Diversion of Claims/Control
Trans-World Group. Transfer pricing
Magnitogorsk charged with the task of managing a 25% stake).
ZAO RudementInvest Insider dealing
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Company Benefiting Party Nature of the
Transactions
Uneximbank‘s officials. Insider dealing
Pioneer Group 1 Article, ref. 44
Coding: Diversion of Claims
Pioneer Bank officials. Insider dealing
Channel 5
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Company Benefiting Party Nature of the
Transactions
Kemerovo administration. Appraisal of assets
MCCI
A police department in St.
Petersburg.
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Below is the summary of various forms of transactions reported in 1998:
Type of transaction Companies
Insider Dealing
Appraisal of Assets
Asset Stripping
Transfer Pricing
Share Dilution
Aeroflot, VimpelCom, AvtoVaz, Gazprom, Sibneft, UES, UES,
Lebedinsky Ore Mining Plant, MOST Bank, Pioneer Group, ORT, Subway, MCCI, Post Office (14 disputes).
Rosneft, Gazprom, Transneft, Tyumen, Krasnoyarsk Hydro Plant, Norilsk Nickel, Lomonosov Porcelain Factory,
Kuznetsky Mine (8 disputes).
Yukos, Yukos, Magnitogorsk, Knauf, Channel 5, Standart NMT (6 disputes).
Rosneft, Yukos, Surgutneftegaz, Sibneft, Sibneft, Sidanko, UES, Novolipetsk, Channel 5, Post Office (10 disputes).
MGTS, KamAz, Yukos, Yukos, Sidanko, Mosenergo, Norilsk Nickel, Lebedinsky Ore Mining Plant, Knauf (9 disputes).
In summary, 1998 involved a variety of stakeholder groups who allegedly abused the corporate system to their advantage. On the government‘s side there were examples of when Boris Yeltsin allegedly received a large number of shares in ORT as a bribe from the then financial tycoon Boris Berezovsky and Anatoly Chubais (Chief Executive of UES) who allegedly walked out of the Russian white house with a $90 thousand dollar bribe for fixing a privatisation deal99. On the local administration level, there was a case involving Surgutneftegaz when subsidiaries diluted the stake of the parent to almost nothing with the help of St. Petersburg officials. Additionally, there were a lot of transactions to the benefit of well-connected individuals like Khodorkovsky, Berezovsky, Potanin, Fridman on the
99 Interestingly, Chubais sued an investigative journalist and a radio station for libel at the time of the alleged offence when the journalist openly accused him of accepting the bribe. Although Chubais was never convicted, a Moscow district court ruled in favour of the journalist and did not award any damages.
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oligarchic level and Bordug, Lisovsky, Sharipov and Sergiyenko on a more modest level of private ‗entrepreneurs‘.
In 2006 a vast majority of disputes associated with transactions with self-interest were also connected with the diversion of claims code. In total there were 31 disputes100 with only a single category of misinvestment not represented in the hierarchy of codes.
Graph 4.25: Transactions with Self-Interest Disputes, 2006
Table 4.12: Transactions with Self-Interest Disputes, 2006
Company Benefiting Party Comments
Template Details Appendix 9b MegaFon 2 Articles, ref. 5
Parallel Coding: Diversion of Assets/ Control
IT and
Telecommunications minister Leonid Reiman
Share dilution
Rosneft 1 Article, ref. 10.1
Coding: Diversion of Claims
Unidentified government and Rosneft officials.
Insider dealing
100 21 individual disputes of which 10 were parallel coded.
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Company Benefiting Party Comments
Template Details
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Company Benefiting Party Comments
Template Details
The government Insider dealing
Yukos
Unnamed third parties. Transfer pricing
LUKoil
CEO Mordoshov Transfer pricing
Evraz
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Company Benefiting Party Comments
Template Details Appendix 9b Eurocement 1 Article, ref. 37
Coding: Diversion of Claims
Majority owners of Eurocement.
Transfer pricing
IKEA 4 Articles, ref. 48
Parallel Coding: Diversion of Claims/ Misimplementation
An unidentified business group.
Asset stripping
Below is the summary of various forms of transactions with self-interest reported in 2006:
Type of transaction Companies
Insider Dealing Appraisal of Assets
Asset Stripping Transfer Pricing
Share Dilution
Rosneft, Gazprom, Yukos, Yukos, (4 disputes).
Rosneft, Rosneft, Yukos, LUKoil, RusAl, RusAl. (6 disputes).
Gazprom, Yukos, Yukos, IKEA (4 disputes).
Rosneft, Yukos, Novolipetsk, Severstal, Evraz, Eurocement (6 disputes).
MagaFon (1 dispute)
The main characteristic in 2006 was a very clear shift away from private individuals benefiting from questionable corporate conduct towards the government. Even disputes involving private individuals like Severstal‘s Mordoshov and Evraz‘s Abramovich were all visibly connected to the government‘s agenda; perhaps with the exception of the cases involving MagaFon‘s share dilution by the IT and Communications Minister Leonid Reiman, Eurocement‘s transfer pricing and IKEA‘s assets stripping. All remaining transactions were conducted to the benefit of the government or were forcefully challenged if they were not in the interests of the latter.