Russia’s Lofty Plan to Privatize State Companies Is Near Collapse : Auctions: Some firms have been sold, but critics say politics, ineptitude have kept many choice holdings off the block.

MOSCOW —  The plan had a certain, simple appeal: The Russian government would sell its share of the Murmansk seaport and pocket enough cash to pay senior citizens’ pensions. Officials would auction stock in a Siberian timber company, and, presto--earn money to heal war-shattered Chechnya.

These wouldn’t be selfish deals, not at all. Set free from state control, the privatized companies would soar. The new owners would earn vast profits and invest them wisely, fueling growth. Western advisors would beam with pride. And Russia would swagger closer still to a market economy.

Smiles all around--that was the plan. The reality, as always, is far less cheery.

Russia’s ambitious program to privatize its choicest companies has all but collapsed in recent weeks. Lawsuits are flying, tempers are soaring and accusations of corruption and ineptitude “are laying a time bomb under the cornerstone of government policy,” as one television analyst put it.

To be sure, the government has succeeded in selling a few major companies, including its top producers of oil (Lukoil) and metals (Norilsk Nickel). A controversial auction of the No. 2 oil firm, Yukos, is set for today, and the state’s stake in the Archangel seaport will be up for bid on Monday.

But some of the government’s most valuable holdings will not hit the block this year, if ever. Nationalist lawmakers have blocked privatization of defense industries with an alarmist clamor: Sell off the Sukhoi design bureau, which crafted an arsenal of fighter jets and bombers? Might as well turn over the keys to the country, they say. Auction the Ulan-Ude Aircraft Plant? Might as well wipe out Russia’s national pride.

Facing tough challenges from nationalists and Communists in the Dec. 17 parliamentary elections, the government has backed off. Defense companies will not be sold.

But that retreat has caused new problems. The government had expected to earn $655 million from privatization in 1995. With big-bucks firms like Sukhoi off the list, economists must scramble to fill a yawning budget gap.

Their solution: a bewildering scheme dubbed “loans for shares.” Under this plan, the government would trade its shares in a shipping company for a multimillion-dollar loan. The creditor would take partial control of the shipping company for three years. After that transition, it would be free to sell the stock. But the government would claim a chunk of the proceeds--enough to wipe the loan off its books as well as earn a profit.

The creditor could profit on the deal only by reforming the company to boost its stock price way up. Theoretically, the promise of juicy profits would encourage the creditor to invest in new equipment and streamline operations to increase the stock price.

More than two dozen of these loans-for-shares trades were supposed to occur in 1995, after open auctions at which banks would bid for the right to lend the government money. So far, however, only seven auctions have been held. And the program has generated at least as much controversy as cash.

Banks left out of the bidding now complain that the auctions are rigged. In equally sinister tones, they suggest that the government is getting ripped off as it sells crucial assets on the cheap. The rush-rush method is no way to run a privatization program, Alfa Bank President Pyotor Aven declared in a broadcast interview: “It takes you several months just to figure out how to sell your apartment, if you do proper market research, and here we are trying to do this all in a month.”

Even Anatoly Chubais, the government minister in charge of privatization, has acknowledged that the loans-for-shares program could use fine-tuning. But he insists the government does not have time to perfect the process. It needs cash now. “It would be great if we could already [carry out] privatization by the book,” he said at a news conference last month. “But it does not happen that way.”

Indeed not. In what seems a clear conflict of interest, the State Privatization Committee has tapped certain banks to run the auctions--and allowed them to place bids as well. The results have raised eyebrows: When Uneximbank organized the auction for Norilsk Nickel, it came out the winner, even though a rival bank bid nearly twice as much.

Menatep Bank is in charge of the upcoming auction of Yukos oil and has already predicted it will win, though it insists the bidding will be fair and open. Its chief competitor--a consortium of three banks--was disqualified this week for not coming through with a pre-auction deposit of $350 million in cash.

Infuriated, the three-bank consortium has vowed to sue Menatep. “The process as it is now is sick,” said one of the group’s leaders, Alfa Bank Vice President Alexander Gafeen. Without competition, Gafeen added, Menatep will be able to buy Yukos at a much lower price.

Other analysts have also suggested that the government is selling its best resources far too cheaply.

Last month, Uneximbank bought a 38% share of Norilsk Nickel--which produces nearly a fifth of the world’s nickel and cobalt and 42% of the global platinum supply--for $170.1 million. That was just $100,000 above the minimum bid.

Chubais conceded that Russia could have reaped more cash by opening the Norilsk Nickel auction to foreigners. But he said a Western buyer would not have understood the company’s social obligations, which include a network of farms, utilities and day-care centers to serve its thousands of workers.

“All these functions would seem strange to a foreign investor,” he said. “It’s not very probable he would take them on.”

Of course, shedding the auxiliary operations might make the company more profitable. But at this stage of privatization, Chubais said, the government is reluctant to disrupt “the unique role of Norilsk Nickel. . . . It sustains an entire city, an entire autonomous area,” on Russian’s northern tundra.

Even if the government had opened the Norilsk Nickel auction to foreigners, its economists would have had a tough time figuring out where to open the bidding. State Privatization Committee spokesman Igor N. Plotnikov laid out a complicated formula for assessing a company’s value, then admitted that he had few real numbers to plug in to the calculation.

“Without a world-class audit, the stocks are worth nothing,” Plotnikov said. “And who has the money for an audit?”