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State Investments Exchanged for State Ownership

June 2013

The Ministry of Economic Development disclosed the program of sale of state property in exchange for economic growth

The lowest rate?

The Ministry of Economic Development submitted the plan of multiple increases of federal budget incomes from privatization of state property to the government. Almost total sales are suggested. The state-owned shares of the largest Russian companies are offered to be sold: “Rosneft”, “Rostelecom”, international airport “Sheremetyevo”, VTB Bank and even the whole Sberbank. In 2013, the federal budget income from privatization, according to the Ministry, could grow by $22 to 26 billion in addition to $6.6 billion stipulated for the privatization plan for this year. Thus, they plan to raise money to accelerate the economic growth at the expense of budget investments into important all-national infrastructure projects.

The history of “big” privatization in Russia mostly consists of resolute oral interventions and careful and quite modest real examples of sales of state shares in large market players. The peculiarity of the current initiative suggested by the Ministry of Economic Development is that it makes a powerful ideological split in those who facilitate a strong presence of the state in the economy. As a rule, the same people talk about the need to preserve the strong state sector at the market while being loyal opponents of privatization, but they also require from the government to make significant financial investments from the budget into various new industrial projects, including those developed to accelerate the economic growth.

Now, the Ministry of Economic Development set a new dilemma in front of them: budgetary investments in exchange for “big” privatization. This can weaken the arguments of the state property supporters in the supreme government of the country.

False Start of “Big” Privatization

The first person to speak about the need of “big” privatization was the Russian president Dmitry Medvedev in 2011. At the St. Petersburg Economic Forum, he criticized the privatization plans of the government calling them “too modest”. Formally, the order of the president was fulfilled by the government of Vladimir Putin:

• the state-owned shares of the largest Russian companies (“Rosneft”, “Rusgidro”, VTB Bank, “Sovkomflot”) which were suggested for sale were increased;
• new assets appeared in the privatization list: Sheremetyevo Airport, “Aeroflot”, “InterRAO Unified Energy Company”, “Alrosa”, “Zarubezhneft” etc.;
• the rates of “big” privatization were accelerated: the deadlines were moved from 2017 (the pre-election year) to 2016.

Not everybody in the government accepted the diversification of privatization plans positively. The main argument of the opponents, including the first deputy prime minister Igor Shuvalov and former vice prime minister and currently the head of “Rosneft” Igor Sechin, was the reference to the rapid decrease of value of the Russian assets after the crisis. They advised waiting for the time when the prices of Russian company shares returned to the level they once achieved.

That’s why not much has been actually sold since then:

• in 2011, a number of foreign investment funds acquired 10% minus two shares of VTB Bank for almost $3.2 billion;
• in the same year, 75% minus two shares of OJSC “First Cargo Company” were sold to domestic investors: $4.1 billion acquired from that sale were placed not into the budget but forwarded for implementation of the investment program of its former owner – OJSC “Russian Railroads”;
• in 2012, the largest privatization deal was the sale of 7.58% of Sberbank shares for $5.3 billion.

“The state increased its presence greatly in various sectors of the economy in the last year. The “shares in exchange for investments” program deployed during the crisis worked fine,” said Sergei Tishakov, the partner of auditor and consulting company “Grant Thornton”. “It’s still not clear how long this trend will last, and whether the state intends to distribute the collected assets.” “Probably, in the nearest future the state will be dominating in every branch it can hold,” Leonid Fedun, vice president of OJSC “Lukoil”, forecasts.

Modest 2013 Plans

The privatization plans scheduled for 2013 and approved by the government are not ambitious: only $6.8 - 7.5 billion are planned to receive. The following objects are to be sold soon:

• 5.66% shares of OJSC “National Company “Rosneft” ($5 billion). The company believes that these privatization plans have been already fulfilled within the framework of the deal on acquisition of TNK-BP Oil Company. After its completion, the British BP company owned 19.5% of the Rosneft shares;
• for 15-18% shares of OJSC “VTB Bank”, up to $3.3 billion are excepted. The Daily Telegraph in Britain informed that the interest to acquire the bank shares was expressed by the Qatar Investment Fund. All this money is decided to forward to additional capitalization of the bank itself. The budget will not receive anything;
• up to 14% shares of OJSC “INTER RAO Unified Energy Company” are expected to be sold to “Rosneftegaz” (formal owner of “Rosneft”) for $1.1 to 1.3 billion;
• 7% shares of OJSC “AC “ALROSA” along with the equal number of shares owned by the government of Yakutia are to be sold by the Russian branch of Goldman Sachs investment bank. It is expected that the federal and regional governments will acquire $0.5 billion each;
• 20% shares of OJSC “Novorossiysky Marine Trade Port” can be sold for $0.4 billion;
• 10% shares of OJSC “ROSNANO” are already drawing attention from the potential investors. The assessed value of the shares is $0,3 billion, but this money is planned to be forwarded to increase of the authorized capital of ROSNANO;
• a quarter of OJSC “Sovkomflot” can be sold for $0,35 billion, half of which will be used to increase the authorized capital of the company, and the other half will be forwarded to the budget;
• deals are prepared to sell 25.1 shares of OJSC “TGK-5” (territorial power generating company in the Volga River basin); 25.5% shares of OJSC “Airline “Siberia”; 25.5% shares of OJSC “SPK Mosenergostroy”; 100% shares of OJSC “Arkhangelsk Minesweeping Fleet”, and 20% shares of OJSC “Novorossiysky Marine Trade Fleet”.

“Total” Sale of State Property

For now, the Ministry of Economic Development already considers these plans modest and requests from the government to start the real “big” privatization. The ministry hopes that profits from the sales of state-owned shares of the largest Russian companies will become the main source of financing of large infrastructure projects. Without their launching, Andrei Belousov department sees no other opportunities to accelerate the economic growth in the country.

• $16.6-18.3 billion can be obtained for 19.5% shares of the largest state oil company “Rosneft”. In this case, the state (or, to say it more accurately, OJSC “Rosneftegaz”) will still own a little over 50% of Rosneft shares. Preservation of such a share is necessary to provide the company with access to the Russian shelf. It is one of the conditions of participation of other partners of the state company – ExxonMobil, Eni and Statoil.
• $5-6.6 billion can be obtained by selling over 50% shares of OJSC “Rostelecom”. After the reorganization which is still being carried out, the state will own about 60% shares of the largest company at the stationary phone communications market.
• $1.1 billion can be received by the budget after sale of the whole set of shares of OJSC “International Airport “Sheremetyevo” – 83.4%.
• 2.3% shares of OJSC “Aeroflot” are offered for sale for $33 million (the state will own 50% plus one share of the airline);
• 26.7% shares of OJSC “United Grain Company” are offered for $66-100 million. The state will still own less than a quarter of the shares. In the last two cases, the money obtained from the sale will be used for additional capitalization of the given companies.
• Finally, the amount to be paid for the sale of Federal State Unitary Company “ROSTEK” (which is owned by a large customs service related infrastructure) is still unclear.

Sberbank contains over a quarter of all assets of the Russian bank system, half of the bank deposits of citizens and one third of all credits granted in the country. Andrei Belousov department offers synchronization of privatization of Sberbank and VTB Bank (it is scheduled for a complete sale by 2016). Today, the Central Bank of Russia owns 50% plus one share of Sberbank. The market capitalization of the whole Sberbank is assessed at the level of $76.6 billion.

Those who oppose against the bold plans of the Ministry of Economic Development have already demonstrated their skepticism. The head of “Rosneft” Igor Sechin advised to reduce the state share in the company “effectively”, i.e. only when its shares achieve a price of an acceptably high level and after complete division of the Russian shelf. The Federal Safety Service, the Federal Security Service and the Ministry of Defense all speak against the reduction of the state share in “Rostelecom” less than 50%.

Total Sale is Off-Season

Not all the experts believe the big privatization is realistic in the nearest future. “Two lines continue fighting: one stands for the expansion of the state sector and increase of its efficiency, the other stands for privatization. This fight cannot be eliminated by command,” states deputy general director of the Interdepartmental Analytical Center Yurii Simachev. Last year, there was a record-breaking privatization plan, and it has been fulfilled ($6.6 billion), Mr Tishakov says. “All negative phenomena in the economies of the USA and Europe make the markets of developing countries more interesting.” But he also thinks that it is impossible to obtain $33 billion at once from the privatization.

The assets are interesting enough, for foreign investors as well, Mr. Tishakov believes. But he doubts the state will want to let go of the majority ownership in them. “This is the matter of politics. Decisions on privatization have been made thoroughly and carefully lately,” the expert says.

“The real driver of privatization is reception of income for the budget,” Mr. Simachev is convinced. They are not “marked” there and can be forwarded not into investments but, say, for fulfillment of social obligations. “By structure, privatization is, first of all, development of competition at the market and increase of competitiveness of companies,” the expert adds.

Mr. Fedun from Lukoil is sure that “the situation will start changing after 2018-2019, when Russia faces reduction of oil mining volumes. Then, questions will arise regarding not the political influence in this or that sphere, but regarding economic efficiency, which was the main lever of privatization in the 90-ies”.

In case of “big” privatization, the matter concerns the largest assets, which are in essence monopolies at their markets. The experts warn that private monopoly can be an even greater problem for the state than the state monopoly.

But for the monopolies the withdrawal of the state from the market can be risky. “It’s not known what Sberbank or VTB would feel like during the crisis if the state did not provide great investments for them,” Mr. Tishakov says. “It’s difficult for a private businessman to support the monopoly. They might start sharing.”

On the other hand, the investors warn that complete withdrawal from the assets by the state is able to undermine its attractiveness. “We like the presence of the state in the company. The state has to be on your side. It won’t provide the funds, but it will help resolve bureaucratic problems and infrastructural problems as well. In Russia, participation of the state would be very useful,” general director of Glencore, Ivan Glazenberg, says.

“The role of the state as the administrator of companies can be received quite positively,” managing director of Temleton Emerging Markets, Mark Mobius, agrees. “But there is always a risk that the state will use its companies in its interests, the interests of the society, but not the minorities. The state has to understand that the companies who have passed listing and have an efficient independent management can bring more profits and usefulness for the state, the society and the economy, they increase attractiveness and efficiency of the state.”

The domestic business has to show the right example to the foreign investors. Absence of internal investment sources affects the intentions of foreign investors, naturally. Russia is the last country they come to. Leonid Fedun says, “As soon as there are some risks, they withdraw at once. Hence is the underdevelopment of our stock market and other financial markets.”

Minor Privatization Expansion

The plans to expand minor privatization might turn out to be more realistic. In the middle of April, the Ministry of Economic Development announced on government approval of additional inclusion of 54 joint stock companies (JSC), 14 federal state unitary companies (FSUC) and one and a half hundred of other property objects (land plots and buildings) to the plan of state property sales for the year 2013. The truth is that there might be other problems with the assets included into that list: it is hard to find buyers for them.

Andrei Susarov,
observer of Finmarket
Informational Agency,
Exclusively for Russian Survey

The list of assets offered to be included in the federal property privatization program for the year 2013