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Analysis & Opinion
22.06.11 Privatizing Russia
By Tai Adelaja

The Russian government may soon embark on the country's biggest privatization journey ever, as the Kremlin redoubles efforts to attract foreign investors and accelerate economic growth. The new privatization drive, which may kick off this year, is expected to dwarf the country's previous chaotic offerings, which saw oil and metal assets sold to well-connected oligarchs in the early 1990s. The renewed impetus for another large-scale privatization, experts say, is a speech by Russia's President Dmitry Medvedev last week in which he called for less state involvement in the economy while promising more privatization.

Plans for the second wave of massive privatization were first announced last year, when the government said it hoped to raise about one trillion rubles ($36 billion) by selling state assets over the next three years. Medvedev called the plan “too modest” last week, and ordered the government to revise it by August 1. The president said he wants a new plan that will loosen the state's airtight grip on the economy by giving up majority stakes in the main state-owned companies. He added, however, that state-owned companies in sectors of the economy deemed to be of strategic importance should remain under government control.

The Kremlin's proposals include selling bigger stakes in state companies Rosneft, Russia’s leading oil producer, and VTB Group, the country’s second-biggest lender, Arkady Dvorkovich, the president’s top economic adviser, told reporters on Friday. Sales of state holdings in other key companies such as Sovcomflot, Sberbank, Russian Agricultural Bank, Novorossiysk Commercial Sea Port and Murmansk Commercial Seaport are also on the table. The Kremlin hopes to boost proceeds from asset sales by 50 percent to 450 billion rubles ($16.1 billion) next year, and expects to collect at least the same amount annually in 2013 and 2014, Dvorkovich said.

While last year's privatization efforts were essentially meant to bridge gaps in the budget, experts see the present privatization drive as an attempt by the Kremlin to boost the effectiveness of the economy. “At the moment, there are no gaping holes to plug in the federal budget,” Yevgeny Gavrilenkov, the chief economist at Troika Dialog, said. “If oil prices remain within the projected $105 per barrel, the oil revenues available to the country should be sufficient to balance the budget within the next five months.”

Russia's budget deficit hit 5.9 percent of GDP in the first eight months of the year, as low oil revenues threatened its resource-based economy, which has lately become a perpetual drag on president Medvedev's modernization efforts. But with global oil prices again in upward swing, the Kremlin appeared in a hurry to diversify the country's economy in part by luring foreign investors. But the dominance of state-controlled companies in the economy is stifling such efforts by undermining competition and threatening investment, Medvedev declared last week.

The latest rhetoric coming from Russian paramount leaders appears to indicate that there is now a general agreement across the board on the need to put an end to state capitalism in the country. Both president Medvedev and Prime Minister Vladimir Putin have also talked of allowing greater foreign access to Russian companies. Putin, who as president created a number of powerful state corporations, told journalists in Paris on Tuesday that he and president Medvedev shared a "joint program" for Russia's development. "I have said many times, in different situations and to different audiences, that we are not going to build any state capitalism," Reuters quoted Putin as saying. "The creation of state corporations is not intended to increase the share of state property. It is intended to pull together assets, consolidate them and raise their capitalization and then take them to the market," Putin said.

“The question is no longer whether or not there will massive asset sales in the near future," Evsei Gurvich, the director of the Economic Expert Group, said. "There is a general consensus in government circles that Russia must reform its raw-materials-oriented, monopolized and government-controlled economy and start building a market economy. This is not an election gimmick. This is forced upon the government by objective circumstances."

Alexei Moiseyev, the chief economist at VTB Capital, said a further argument in support of sincerity and intensity with which the government will likely pursue the present privatization drive is that revenues from assets sales are not meant to boost the government's pre-election war chest. "I think asset sales will follow the recent template, when most went to private investors,” Moiseyev said. "The president was very specific when he said he wants to do away with state capitalism.”

Yet some experts have expressed concerns over whether the government is capable of conducting a privatization transparent enough to attract private investors. “A lack of competitive bidding that will allow private investors to buy state assets will leave them up for grabs by cronies who may turn public monopolies into private monopolies,” Gavrilenkov said. Gurvich believes that the only way to ensure that assets that will inevitably end up in the hands of well-connected Kremlin insiders will not be transformed into private monopolies is for the government to “privatize and de-monopolize simultaneously." Another option, Gavrilenkov said, is to declare another “people's IPO” or sell assets en-masse to private equity investors and strategic buyers. “If past privatization experience is any indication, the government seems determined to open up the economy to private domestic and foreign investors."

But past experiences also include a long list of backdoor dealings when state assets ended up in the hands of mysterious bidders, as in the case of seized Yukos assets. "The $64 million question is who gets to buy these assets," said Peter Westin, the chief strategist at Aton Capital. "A lot, of course will all depend on the price. One can also speculate that some assets, especially in transportation, previously a strategic sector, will be sold to Russian interest groups rather than to foreigners.”

With global oil prices on the rise, some experts believe that a Russian government awash in oil revenue could easily be tempted to delay massive privatization. “Rising commodity prices can indeed break the privatization process in terms of speed,” Westin said. But while fluctuating oil prices often get the blame for delays in restructuring and reforms, he said, there are reasons to expect the present privatization to pick up steam. “If we take the president at his word, the clear-cut goal is to improve corporate governance and transparencies in state-owned companies," Western said. “This is a different agenda and it’s likely to go ahead whatever the price of oil.”
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