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Unappopriated Privatisation

December 2011

The large-scale “moderation” of the Russian government’s privatisation plans, at least, in comparison to the initial scenarios, has resulted in the sale of state-owned assets having practically come to a stop. Public servants speak of the need to “wait out” the period of instability in the global financial markets. Experts recommend to aim not for getting more money out of selling state-owned property, but for getting a more efficient owner instead.

In early August Russia’s first vice prime minister Igor Shuvalov presented his report demonstrating the willingness of the government to sell blocks of shares of major Russian companies. This was done after an explicit demand to adjust the “excessively moderate” privatisation plans was addressed by Russian President Dmitry Medvedev to the cabinet of ministers at the Economic Forum in Saint Petersburg this year. The expected volume of proceeds from the sale of state-owned assets has increased reaching 6 trillion rubles. This is, however, a projection spanning the period until 2017.

The state is ready to withdraw completely from the authorised capitals (retaining only “the golden share”) of such companies as OJSC SovKomFlot, OJSC Sheremetyevo International Airport, OJSC INTER RAO UES; OJSC VTB Bank; OJSC RusHydro, OJSC NK Rosneft, OJSC AK Alrosa. The government will only begin to examine the possibility of selling the state-owned blocks of shares in these companies beginning with the year 2012. Prior to the intervention by the head of the state, the question was about selling over the period until 2013 of only 50% minus one share of Sovkomflot, less than 8% shares of RusHydro, with the possibility of partial selling until 2015 of some other state-owned blocks of shares of these two companies, 35% of shares in VTB and a 25%-share in Rosneft. Sheremetyevo Airport, INTER RAO UES and Alrosa were not mentioned in the privatisation plans. The sale of OJSC Zarubezhneft owned by Russia and of the state-owned block of shares of OJSC Aeroflot – Russian airlines, although not planned, is not impossible either.

The government would consider offering RosSelkhozBank for sale, - although earlier discussions only included a possibility of selling a mere 25% of its shares prior to 2015, - and RosAgroLeasing, whose privatisation was not planned initially. That said, before that the government intends to withdraw the government support of the agricultural sector functions from them. It is also proposed to reduce Russia’s share in the authorised capitals of OJSC United Shipbuilding Corporation and OJSC United Aircraft Building Corporation to a controlling stake (50% plus one share) and to 75% plus one share in OJSC NPK UralVagonZavod, OJSC FSK UES (an earlier plan envisaged the sale of slightly more than 4%) and OJSC Transneft, starting from 2017.

The current forecast privatisation plan for the period of 2011-2013 has undergone only minor changes ever since, mainly in the form of smaller state-owned companies having been included. Major state-owned assets are again barely mentioned in it, yet the deadlines for the pending privatisation were defined extremely tentatively.

In September the Ministry of Economic Development of the Russian Federation presented to the government and published a draft decree on the sale of state and municipal assets, including state-owned blocks of shares in companies at electronic auctions. The companies in question are smaller enterprises whose assets can be freely bought via Internet. Auctions will be held in the form of classical electronic auctions for increase or for reduction, specialised auctions which end in all winners obtaining shares in an open joint stock company at the same price per share. In the event of sale of more than 50% of shares in a company, competition must be held with buyers competing on prices stipulated in advance in their bids. Privatisation may also proceed by way of public offer or sale without price announcement.

In the meantime, the government is also considering further elaboration of the procedure for exclusion of companies from the privatisation plans. In August the Ministry of Economic Development and Trade prepared a draft decree under the provisions of which refusing to sell a company included in the privatisation plan will only be possible on the basis of a governmental decision. To obtain such a decision one needs to obtain an approval not only from the relevant ministry or authority, the Federal Property Management Agency, but also from the Ministry of Finance, the Ministry of Economic Development, as well as from the vice prime minister in charge of implementation of the privatisation plans. “Refusal to рrivatise any company must be substantiated: what specific tasks are fulfilled by the state through participation in their capital”, such is the opinion of the director general of the Interdepartmental Analytical Centre Yury Simachev.

The recent exacerbation of the situation in the global financial markets has almost suppressed even mere talks about the large-scale privatisation pending. “We are waiting for better markets with more favourable conditions. That is why any assets will only be on sale later on”, - this was the explanation offered at the end of September by the then Minister of Finance Alexey Kudrin. Minister of Economic Development Elvira Nabiullina claimed that the privatisation of major companies may be postponed until 2012, if the market shows no growth in 2012. “We are most reluctant to sell shares at a big discount”, she explained. “It would be most undesirable to have all our transactions postponed because of the situation in the global markets and rescheduled for some vague indefinite date”, said the head of the Ministry of Economic Development, thus practically allowing for such a possibility.

There is no gainsaying that market failure periods are not the most convenient time for privatisation”, agrees Simachev. “Privatisation is by no means a goal in itself. What is of real value are structural changes in the economy related to the arrival of strategic investors”, claims the expert. He believes that the privatisation plans have to be announced, but equally that no rigid timing is necessary in their respect. “There is currently a global trend towards privatisation observable on a large-scale in Brazil, China, India, the US. And a considerable share of resources that we could possibly count on may become unavailable,” warns the expert. But, at the same time, waiting when it comes to selling under the market growth trend in order to sell at a better price in a year or two is not an option either. “That way privatisation may be protracted indefinitely”, Simachev says.

The major expected privatisation transaction of this year is possibly the sale of 7.6% of shares of Sberbank scheduled for September-October. However, its head German Gref told about an understanding achieved with the key state shareholder of the company – the Bank of Russia – that no distribution will be performed due to the volatility of the markets, instead they will be waiting for a “window” that may open either this year or the next. The same happens with the sale of yet another 10% block of VTB shares. Director of the Department of Property Relations at the Ministry of Economic Development Alexey Uvarov specified that its selling price is expected to be not lower than that of the block of shares which was sold this year at 94 billion rubles. But it is the privatisation of the 10-15% of Rosneft that is expected to yield over 200 billion rubles - the largest amount in 2012. All in all, the 2012-2014 federal budget plans to realise less than 1.2 trillion rubles as a result of the privatisation, of which 300 billion rubles are expected to be realised during the next year.

Yet privatisation does not stop completely. On September 23 the Federal Property Management Agency put up 51% of shares of OJSC Osetrovsky river port for sale. The starting price was established as 362 mln rubles. This is the country’s largest river port located on the Lena river in the town of Ust-Kut in Irkutsk region (the east part of Siberia). As long as it has railway communications, it serves as the main base for the transportation of goods into Yakutia. The company’s director general Andrey Zakharov concluded that up to 25% of shares owned by minority shareholders had already been bought in the interests of TNK-BP. Other companies operating in the region, such as SurgutNefteGas and Gasprom, may also show interest in the port.

Privatisation is in the interests of Russia’s economy. The return on most privatised assets increases, deputy head of the Federal Property Management Agency Eduard Adashkin said with reference to the post-sale monitoring data collected by his agency. According to him, the point is that investors involved in the privatisation have undergone qualitative changes since 2009. “Speculative transactions are matter of the past, and the majority of real estate items are no longer of any value on their own”, he says. Owners receive profit from the expansion of industrial production.

Large-scale sale of assets may also prove to be a good chance for Russia’s financial elite to increase the credit portfolio. The bulk of the assets will, in all probability, be bought by Russian investors in the framework of extended privatisation, using Russian banks’ own funds, claims senior director of the Fitch Ratings department for Financial Institutions Analysis Alexander Danilov. According to his estimates, the allocation to our financial institutions of three quarters of the 6 trillion rubles that our government plans to realise through privatisation over 2012-2016 will allow banks to increase their credit portfolio by 5% a year.

Simachev feels sure that “our business community will undoubtedly lack resources to achieve its distribution within the country”. This means that the risk of privatisation by the same quasi public structures using funds borrowed from the state remains. “What is needed is minimum involvement of the state banks’ resources”, says the economist referring to one of the key threats. He believes that the presumption of usefulness of foreign investors is a necessary basis, “When companies become more internationalised and part of globalised chains, more realistic estimates of the effectiveness of these companies’ operations appear”, the expert added.

“On the other hand, classical privatisation is fraught with the danger of a considerable share of resources being excluded from the process of assets modernisation. The effect of the structural changes will be all the more noticeable, when the state not only sells its share, but also allows to sell new shares or to organise the initial public offering, resulting in the dilution of the state-owned block of shares. Formally speaking, this is not privatisation, as the money goes not into the budget but to the companies themselves. And it is not right when such a scheme operates only in respect of a limited number of state-owned companies”, believes Simachev. And the first positive signs of successful privatisation of assets are investments inflows to the company and the rising demands to the quality of management.

The trouble is that the state has grown accustomed to solving problems in respect of a number of sectors of economy through its direct intervention and participation in major companies. Unless industrial antimonopoly regulation is properly developed, the risk of the state being compelled to intervene into these companies’ operation in the event of significant costs arising there remains. This, however, does not mean that privatisation is better to be renounced until new rules of the game appear. However, in this case it is more sensible to opt for the mixed ownership stage. “This will not entail big risks of a loss of manageability in these companies”, the expert believes.

Andrei Susarov,
Tax columnist for the Moscow news
Exclusively for Russian Survey