Russia’s “new wave” of privatisation overblown

October 27, 2009

Russia has been talking up its privatisation plans. Earlier this month, Prime Minister Vladimir Putin described the sale of state assets as “one of the key tools of structural reform”. His deputy, Igor Shuvalov, has talked of privatising 5,500
state enterprises over the next few years, with the first 450 to be placed on the block next year. This has led to excitable talk about Russia’s “new wave” of privatisation.

But a reality check may be in order. Russia’s privatisation plans are less impressive than the exciting rhetoric suggests. If the government really wants to make an impact, it will need to be a lot bolder. Don’t hold your breath.

Putin and his government have long touted the advantages of private ownership. This talk has not been matched by results. Indeed, the value of the state’s share of those companies that are publicly-traded on the stock market has actually increased from 27 percent to 52 percent over the last five years, according to Uralsib, a Moscow bank.

The reason? State-controlled enterprises have been on an acquisition binge. Gazprom, for example, owns major assets in oil, electricity, media and banking, as well as its core gas business. Russian Technologies, which began life as Russia’s arms export monopoly, owns stakes in over 400 companies, including the largest car-maker AvtoVAZ.

Russia should break up these unwieldy conglomerates if it wants to reform the structure of the economy. For example, there is no logical economic reason why Gazprom continues to own NTV, one of Russia’s largest commercial TV stations. The sorry state of near-bankrupt AvtoVAZ shows that arms-exporters have no business managing Russia’s car industry.

In contrast with what is needed, the privatisation plans presently on the agenda look like chicken-feed. True, the target for privatisation revenues has risen from $240 million to $2.4 billion. But that’s less than 25 percent of what Poland is targeting for 2010 and represents just 0.3 percent of the total capitalisation of the Russian stock market.

Selling off thousands of state enterprises may look like a big move. But Russia has been trying to sell most of these companies for years. Between 2004 and 2006, it sought to sell state stakes in around 1,500 companies each year, but only achieved about one third of its target. Most of these companies, mainly little-known Soviet relics, are probably unsellable.

The government has also promised to reduce its shareholding in large state companies, by floating minority stakes. Oil company Rosneft, the banks Sberbank and VTB, telcoms operator Svyazinvest and the aviation holding company UAC are among the crown jewels eventually slated for partial privatisation.

But while this may cut the state’s direct stake in listed Russia Inc, it’s only a half
solution. The state remains determined to hang on to majority ownership. Nevertheless, a greater share for private investors would aid corporate transparency and oversight, and stimulate the growth of the capital market.

But investors shouldn’t expect Russia to move fast, even with these half measures. None of these companies are on the block next year. So far, officials have named just two major assets slated for sale next year: a 13.1 percent stake in insurance company Rosgosstrakh, and a 20 percent stake in shipping company Sovcomflot.

Finance minister Alexei Kudrin thinks that the government should wait at least three years before selling stakes in large strategic companies. A lot can change within three years. If oil prices continue to rise, the reform impetus in Russia could easily lose steam.

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