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Analysis & Opinion
13.02.12 Privatization Slowdown
By Tai Adelaja

Major Russian energy companies have been trying to delay or opt out of the government’s ambitious privatization program ahead of an imminent power change in the Kremlin. Russia's outgoing president Dmitry Medvedev ordered more aggressive privatization of state stakes in key companies last June, as he pushed to attract “smart investments” to further his modernization agenda. Since then, some of the biggest and juiciest state assets have come under review for privatization. Many state-owned companies, however, have been resisting the move and some, especially in the energy sector, have adopted a wait-and-see attitude.

The Russian government last year committed to selling its remaining shares in the country’s leading energy companies, including RusHydro, Rosneft and Zarubezhneft by 2017. The government also unveiled plans to reduce its shareholdings in power grid operator Federal Grid Co., as well as in the country’s oil pipeline operator Transneft. But in a detailed report published by Interfax late last Friday, Russia’s Energy Ministry said it opposed the planned privatization of the companies, pointing out, among other things, that the state budget will gain little if the government goes ahead with the asset sale now. Under the prevailing economic conditions, the ministry said, the sales of state assets will have negative consequences for the economy. It added that the Russia's business partners abroad are not ready for the planned change of ownership at those companies.

According to a schedule distributed by the Economic Development Ministry last month, the government is expected to reduce its stakes in the country's largest hydropower producer, RusHydro, to 50 percent plus one share this year from the 58.6 percent it currently controls. However, RusHydro has indicated it would put the privatization plan on hold until at least 2015, saying it needs time to complete its asset consolidation and modernize its Sayano-Shushenskaya power plant, where an explosion killed 65 people in 2009. Though the government said it still plans for a full sale of its 58 percent stake by 2017, it announced in January that the state-run development bank VneshEconomBank would pay 64 billion rubles ($2.1 billion) for an 11-percent stake in the power plant. Analysts believe that the cash infusion, which the government says would finance RusHydro's investment program, will actually replace the company’s privatization plan for 2012.

The Economic Development Ministry also hopes to sell off 15 percent of the government’s 75.16 percent stake in the country’s largest oil company, Rosneft, this year, and exit entirely by 2017. But according to the Interfax report, Energy Minister Sergei Shmatko was categorically against the plan. Shmatko argued that reducing the state’s stake in the oil major would deprive it of a sovereign credit rating and raise the cost of borrowing for the company in financial markets. He also said that lack of state control could hamper the company’s efforts to develop the huge hydrocarbon reserves on Russia's continental shelf.

State energy explorer Zarubezhneft, which develops oil and gas fields abroad, has also been resisting imminent privatization with strong backing from the Energy Ministry, reported on Saturday. While the Economic Development Ministry said it aims to sell the state's100-percent stake in the company by 2017, the Energy Ministry warned that private shareholders would pay less into state coffers than the government currently receives by retaining control. The same story is being replicated in other state-owned energy companies, including the oil pipeline monopoly Transneft. The initial plan was to reduce state shareholding in the company from 78.1 percent to a controlling stake of 50 percent plus one share. But after the company's management objected, the government agreed to sell just 3.1 percent starting this year.

The prospect of selling such a modest share spurred protests on behalf of the Energy Ministry, which insisted that the share sale must be put off by another two or three years, as the value of the company cannot be realistically assessed under the current economic conditions. Transneft now says it needs time to prepare its consolidated financial statements according to international accounting standards, which it could only start doing next year. The ministry also expressed concern that reducing the government’s stake will give minority shareholders veto power over the company’s projects, including the construction of the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline.

Some analysts said the push to put off privatization of key state energy companies is a sign that the Energy Ministry is not yet convinced that in order to modernize, the government must loosen its tight grip on the country’s natural resources. "The fulfillment of transparency requirements by energy companies entering the Stock Exchange, as well as the likelihood of the minority shareholders interfering with corporate management, will weaken the Energy Ministry as a market regulator,” Pavel Gennel, the chairman of the Board of Directors at MC Stolychnaya Financial Corporation, said. Others said the ministry has legitimate concerns, especially since the country is still not completely out of recession. "It's certainly not the best time to go ahead with privatization of the energy companies," Vladimir Tikhomirov, the chief economist at Otkritie Capital, said. "The problem is not just in the shortfall in revenues from asset sales. Companies will be more efficient if they are allowed to complete planned modernization and reorganization."
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