Privatization Going On But Not For Everyone

Privatization Going On But Not For Everyone
Russia’s Ministry of Economic Development has made up its mind on the list of state assets to be privatized in the period of 2020 through 2022. Now the government is to examine it and make a decision on what will be more profitable for the budget -- to sell these companies or to continue receiving dividends from them.

Oksana Tarasenko, the Deputy Minister of Economic Development said that the privatization plan for 2020-2022 had been submitted to the government. She told Interfax news agency that, along with it, the ministry is expected adopt the forecast plan by the end of the year so all the comments should be withheld. “They can be withdrawn only at the level of the Russian government,” said Tarasenko who is in charge of privatization issues in the ministry.

Tarasenko noted that the new plan embraced a number of assets from the previous one for 2017-2019, while the discussion on a number of “controversial” companies would be continuing at the government level. According to her, such companies as the Russian shipping company Sovcomflot, Makhachkala Commercial Sea Port and Novorossiysk Commercial Sea Port (NCSP Group) were included in the new list for sale. At the same time, she refused to name any other companies on the list.

“At present, such companies as Russian state-owned transport monopoly Transneft, Russian hydroelectricity company RusHydro, the Rosseti power company and Russian Railways (RZD) state railway corporation are not in the plan. But we considered some of them at the very beginning. If the government deems it necessary, it will add them to the new plan,” Tarasenko said.

Earlier, the Ministry of Finance proposed to include such assets as Aeroflot, the Zarubezhneft state-controlled oil company, State Transport Leasing Company (STLC), RZD and Channel One Russia in the program for 2020-2022.

However, Tarasenko said the STLC and Channel One would be unlikely included in the privatization plan. She added that the draft program will not also include RusHydro, Rosseti and Transneft because of the position of the Ministry of Energy.

“It is really important that everybody understands how many dividends this or other company is bringing. Therefore, the government is going to address the issue also from the point of view of this correlation: what will be better to sell and what will replenish the budget through dividends,” she added.

Thus, the Ministry of Economic Development has decided to get over to some long-shelved privatization plans. Vyacheslav Maksimenko, the director of partner programs of the Lineyka investment and educational platform, is confident that for the next two years the government will have significantly better chances to get fair assessments of the buyers for the stakes in RusHydro, Sovcomflot, Transneft, Rostelecom, Rosseti, Aeroflot, RZD and hundreds of little-known companies that still remain state-owned.

At present, the imposed sanctions have lower impact on the value of Russian assets, Maksimenko told As well as the situation in the commodity markets is of a less concern, and some achievements in macroeconomic stability have been made. The stock market is breaking records offering the highest dividend yield in the world. Russian federal loan bonds allowed foreign investors to make good money after the leading news agency Bloomberg had recognized them as the idea of the year. But the question is, will all these plans come true?

The state budget does not need extra money badly -- it has already been drawn up with a surplus. According to Maksimenko, the “money box” of the National Wealth Fund will exceed the required limit of seven percent soon, allowing the Ministry of Finance to invest additional billions of rubles in support of the economy. Nobody is going to listen to the recommendations of any foreign consultants and liberal economists to reduce the share of the public sector in this country. Even if these plans are implemented, they will be implemented only partially.

Maksimenko believes that the main candidate for market assessment is the nonpublic company Sovcomflot. Aeroflot has been presented already in the stock market in order to make this non-strategic industry more competitive. Hypothetically, RZD might be privatized but it is highly unlikely, and the government would hardly transfer control of it.

At the same time, the privatization of the power engineering companies RusHydro and Rosseti will be postponed until their capitalization has been restored to a fair level. The same goes for Transneft but to a smaller degree. It suffered from an incident this spring when dirt was detected in the Druzhba oil pipeline. For other companies, the willingness of the current executives of state companies to get used to being under control and to become “transparent” might be more important than the matter of the price.

 “In a market economy, economic agents are driven by the concept of benefit. If an asset is sold, it will be replaced by another asset that is more profitable from the point of view of the economic agent. In this case, it is planned to put up for sale the assets, the profits of which have been steadily playing the role of a shock absorber for the budget,” Alexander Osin, an analyst of operations management at the Russian stock market in Freedom Finance Investment Company, said in his interview with

The conclusion about what assets the government will purchase instead of the former ones could be made on the basis of the analysis of the National Wealth Fund investments, Osin says. Its investments in infrastructure have already become a cause for investigation by law enforcement agencies. On 4 July, Interfax said a case had been opened against the former chair of the State Company Russian Highways (Avtodor) after the Accounts Chamber and the Prosecutor's Office had discovered numerous violations during the construction of the Central Ring Road in the Moscow Region. The National Wealth Fund investments in the Baikal-Amur Mainline are also highly risky and also hard to control, given the long-term nature of the project. In spite of almost 20 years of Soviet investments the country has received the unfinished project with a carrying capacity four times lower than that of the Trans-Siberian Railway.

From the point of view of the assessments of changes in the efficiency of these enterprises once they go private, it is worth noting that to some extent, all of them are monopolies in their market segments, Osin says. As a result of privatization of these companies, competing interests between economic agents via strengthened private industry monopolies and the rest of the businesses and society may intensify. There are no mechanisms to mitigate such risks in a market economy.

Third, the majority of these companies are cheap judging by their capitalization to the net profit ratio. The consolidated budget of the Russian Federation based on the government plan and statistics for 2019 - 2022 is envisioned to be surplus.

In such circumstances, the opponents of privatization will have a lot of arguments to postpone it.

Osin is confident that including the biggest companies’ stakes in the privatization plan does not mean that they will be sold during 2020-2022. For instance, the government has been trying to sell 25 percent of Sovcomflot since 2011 but 100 percent of the company's shares are still owned by the state. The situation is similar with the United Grain Company. The initial plans suggested the selling of 100 percent in it but only fifty percent has been sold, while the investor was the quasi-public VTB Bank. A similar scenario is most likely in case of the plan for privatization through to 2022, announced in September.

The forecast plan for privatization of federal property in 2020 and for the scheduled period of 2021 and 2022, submitted to the State Duma in October along with the draft federal budget for the relevant period, presupposed less shares of the Russian Federation in RusHydro, Sovcomflot, Transneft, Rostelecom, Rosseti and United Grain Company. However, Ivan Bezmenov, the director of corporate management department at the Ministry of Economic Development, said later that in coordination with the Ministry of Energy, the ministry of Economic Development had decided to stay away from including RusHydro, Rosseti and Transneft in the privatization plan for 2020-2022.

In particular, Energy Minister Alexander Novak said straightforwardly that Rosseti was “undervalued”. And there was a “similar situation” with RusHydro and Transneft. In this regard, the Ministry of Energy considers the privatization of these companies to be irrational.

However, privatization is necessary without any doubts: since the federal budget, despite its surplus, annually cuts the allocation of funds for such fundamental and socially important spheres as healthcare, education and infrastructure. And the development of modern society is inconceivable without them. Meanwhile, Aleksey Moiseev, deputy finance minister, said earlier that the Ministry of Finance had proposed to reconsider the possibility of privatization of Transneft, RZD, Aeroflot, Rosseti and RusHydro, and this could be done after 2020.

“But I would start with the government-owned banks not mentioned in this list,” said Vladimir Rozhankovsky, an expert at the International Financial Center, in his interview with “Banking is the most vulnerable economic sector, often losing profitability for one sole reason -- the small variety of shareholders. Private banks are forced to be constantly ahead of the “time wheel” and compete with each other for the most attractive interest rates on loans and deposits, as well as to develop increasingly reliable investment products. Today, state banks are losing a great deal of investors as a result of low interest rates and huge spreads between credit and deposit rates. All this is a consequence of the reducing competition due to the merger and consolidation of operators in this sector in recent years.”

Rozhankovsky believes that the second important condition for successful privatization auctions is, as the saying goes, to make provision for a rainy day but in good time. In order to carry out profitable privatization bidding contests, it is necessary to make the domestic stock market more attractive in order to revive the investors’ hope that their shares in Russian state companies will get an adequate market assessment. This is an extremely important and perhaps the most important motivation for them, and this should not be forgotten.

 “How to make this work is a really big question because the domestic stock market has been deteriorating for almost a decade. It is always easier to prevent any process than to fight with the consequences. But we are where we are, so we need at least to show a desire to overcome such consequences,” Rozhankovsky says.

Company management should once again remember how to prepare international road shows, to select bright and talented people for public presentations and at the same time to demonstrate a sincere desire to fight against all behind-the-scenes destructive processes that hinder the free circulation of such liquid investments on world exchanges: manipulations, collusions, nontrasperency, late submission of public information, insider trading, etc. “I think this is precisely the latter factor which determines further success and plans for privatization v. 3.0,” Rozhankovsky says.

Meanwhile, Narek Avakyan, the head of Investment Department of BCS Broker (BCS Financial Group), told that in terms of privatization, the most interesting are, of course, the plans for Rosseti, Transneft and Rosneft. As for Rosneft, the state's share is 50 percent plus one share now, and its privatization seems unlikely to me. There is a probability that Rosseti, Rostelecom, Transneft and Sovcomflot will be privatized. But in the latter case there are two options: either limited privatization through an IPO, or full privatization with the involvement of a private investor. In this case, it will be difficult to evaluate the package of shares sold.

“In general, I believe that the privatization forecast is missing specific figures including the planned sale of stakes in state companies, the expected amounts of revenues from this sale, etc. At the same time, the possibility of privatization itself seems to me rather slight, as there is a very strong opposition both in the state companies themselves (at least in some of them), and the relevant departments,” Rozhankovsky said in conclusion.