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Analysis & Opinion
07.02.11 Privatization Bonanza
By Tai Adelaja

Russia's much-vaunted "Second Privatization Program" is set to kick off on Monday with initial public offerings of state-owned assets in the banking sector. The government plans to sell a ten percent stake in VTB Group, the country’s second largest lender, in the first step of a two-stage privatization program. The government could make as much as one trillion rubles ($34 billion) from selling stakes in ten state assets by 2013. The weighty privatization program, which received the government’s approval in November, is also expected to loosen the government stranglehold on the economy and help plug gaps in the budget created by the worst recession in a decade.

By its sheer size, the present privatization effort is second only to the great privatization bonanza of the 1990s, when nearly half of Russia's wealth was transferred to Kremlin-connected oligarchs at knockdown prices, analysts say. The government expects to raise up to 1.8 trillion rubles ($58.5 billion) by 2015 from privatizations of federal property, including stakes in some 900 companies, First Deputy Prime Minister Igor Shuvalov said in October. Shuvalov, who is also the country’s Investor Ombudsman, said early targets for privatization would include a 100-percent stake in the United Grain Company and 50 percent minus one share in the shipping giant Sovkomflot — both of which are set to be sold by 2013.

In addition to VTB Group, which will start a road show on Monday to promote the sale of ten percent of its shares in the United States and Europe, the government also wants to reduce its massive stakes in other state banks by 2015. As part of this program, the government will whittle back its current 60.3 percent stake in top lender Sberbank to a controlling 50 percent by 2014. It may also sell 25 percent of its 100 percent stake in Rosselkhozbank, the country's fourth biggest lender by assets, before 2015, Shuvalov said. Sberbank hopes to sell a 7.6 percent stake in stages before the end of this year, depending on the performance of the VTB offering. "The list of investors may be the same, so we should probably work together and agree on a common approach," Sberbank CEO German Gref said.

Other assets that the state intends to sell over the next five years include stakes in the country’s largest airline, Aeroflot, and number one oil producer Rosneft. Shuvalov said the state's holding in Aeroflot could be reduced to a controlling 50 percent. Meanwhile, up to 15 percent of Rosneft and 25 percent minus one share in Russian Railways could be up for sale. Shuvalov also said the state was ready to sell 4.11 percent in the Federal Grid Company immediately; eight percent of RusHydro by 2013; part of its stake in Rostelecom after its reorganization with Svyazinvest; and 50 percent minus one share in Rosagrolizing between 2013 and 2015.

But some foreign and local investors have said that the massive government privatization program does not go far enough. They stressed that the government should consider selling stakes larger than just ten percent in state-controlled financial institutions, The Moscow Times reported Friday, citing panelists at last week's forum organized by investment bank Troika Dialog. Presidential Aide Arkady Dvorkovich has put his weight behind the proposal and promised to push for cutting the government’s stakes in state banks to less than controlling, the paper said. “I think that it’s necessary to privatize VTB in full or almost in full if it buys other banks, and it’s quite possible to think of reducing the state’s stake in Sberbank to less than 50 percent — not only to 50 percent plus one share,” the paper quoted Dvorkovich as saying at the forum.

VTB Group had sought to sell the ten percent state-owned stake last year in a private placement to a pool of strategic investors led by the global private investment firm TPG Capital (formerly known as Texas Pacific Group), Kommersant business daily reported Friday, citing unidentified people close to the bank’s shareholders. As part of the terms of the initial deal, investors would be required not to sell shares acquired in the course of privatization over a period of three years. But the deal, expected to have been concluded last year, fell through as the bank failed to form a pool of investors.

The government might also have decided to change its sales pitch in favor of a secondary public offering (SPO) after Merrill Lynch, one of VTB’s bookrunners, expressed concerns that any hitch in private placement could have a negative impact on the whole government privatization program, Kommersant reported. However, TPG Capital, which manages over $47 billion of capital, is still expected to play an active role in attracting “a wide range of investors” to VTB Group in the secondary share placement. Italian insurance group Generali may become one of the strategic investors for the purchase of state-owned VTB, Vedomosti business daily reported on Monday, citing informed sources. The price of VTB’s London-traded global depositary receipts has fallen from $7.50 to $6.80 over the past week in response to the news that the secondary share placement was going ahead, the Financial Times reported Friday. Chris Weafer, chief strategist at UralSib Financial Corporation said in a note on Sunday that response will remain weak until there is more clarity about the VTB secondary public offering.

Whatever the situation on the ground, the government is poised to sell as much as 20 percent of VTB bank this year and hopes to rake in close to a 67 percent premium on the purchase price, Finance Minister Alexei Kudrin told investors at the Troika investment conference Wednesday. The government has already hired Deutsche Bank, Merrill Lynch and VTB Capital – VTB's investment banking arm – to act as bookrunners, Reuters reported last week, citing unnamed state officials aware of the deal. According to these sources, there will be no further sale of state-owned VTB shares in the three months following the closure of the placement, the official told Reuters. But Interfax reported late Thursday that the government might double its offering to 20 percent if there is sufficiently high demand.

According to the current state privatization plan, the Russian government intends to sell 35 percent of VTB this year and next, reducing its stake to a controlling 50 percent plus one share, RIA Novosti reported. The government boosted its stake in the bank to 85.5 percent from 77.5 percent in September 2009 by acquiring shares for 180 billion rubles as part of a program to stabilize the financial industry. A ten percent stake in VTB was valued at $3.6 billion on the Russian Trading System Stock Exchange (RTS) on Thursday. The sale of the ten percent stake of state-owned shares in the bank could fetch the government a whopping $3.5 billion, analysts say.
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