Russian Government Better Off Not Selling Natural Monopolies

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Jul. 20 – While the Russian cabinet has been trying to accelerate privatization, foreign experts suggest it may be better to ease up, saying that selling the “natural monopolies” could possibly be counter-productive.

Giving a speech at the St. Petersburg Economic Forum this June, President Dmitry Medvedev demanded that the government correct plans for privatization of large state companies till August 1, 2011.

“Great volumes of property aren’t necessary for the state. The government has presented offers under the schedule of privatization of the large companies. Realization of these plans certainly is necessary, but they are too modest,” Medvedev declared.

“A more careful approach is required concerning infrastructural monopolies and the enterprises necessary for maintenance of military safety of the state,” he added. “I am sure we can carry out privatization by transparent modern rules – to involve effective private investors and to collect the big means for the Russian budget.”

Earlier this month Dmitry Medvedev summoned the heads of 27 of Russia’s largest companies such as Evraz, Lukoil, Sistema and Sberbank to discuss recent initiatives to improve the investment climate. And they told the president to get a move on with the privatization program.

Presidential aide Arkady Dvorkovich urged the government to take another look at the US$59 billion privatization program, RIA Novosti reported.

“Several companies should be privatized faster. More and faster,” he said.

Last week, the Russian cabinet was discussing the sale of 10 percent of Russian Corporation of Nanotechnologies (Rusnano), and a reduction in state ownership to 50 percent + 1 share in each of Russian Railways, Inter-regional Electricity Distribution Grid (MRSK-Holding), Federal Electricity Grid (FGC) and oil pipelines monopolist Transneft.

Russian Railways is presently 100 percent owned by the state, which also has 53.69 percent of the shares of MRSK-Holdings, 79.48 percent of the shares of FGC, and 78.1 percent of Transneft.

There are suggestions of a possible sale of 10 percent to 15 percent of Rosneft in 2012, with subsequent sales resulting in the state retaining only a “golden share.” It will permit state representatives on the board of directors who can veto very significant transactions, such as changes in authorized capital, corporate reorganization and changes in statutes. The present state shareholding is 71.16 percent in Rosneft.

Some reports suggest that “golden share” destiny is in consideration for Russia’s largest power generating company RusHydro as well. Currently, the state owns 57.97 percent of company assets, but there are also reports suggesting a 50 percent + 1 share for RusHydro.

Jeff Schubert, an economist who provides commentary on the activities of 21 Working Groups involved in renewing Russia’s economic and social strategy for implementation in the period up to 2020, believes there is little sense in reducing share-holdings in Railways, MRSK-Holding, FGC and Transneft to 50 percent + 1 share.

“There are core natural monopoly assets in each of these organizations, and these will necessarily remain regulated as to both prices and services,” Schubert writes in his blog Russian Economic Reform.

“I would be surprised if the “golden share option” for RusHydro will be accepted. There is lots of infrastructure-type issues associated with such water control, and the government should retain the pro-active possibilities of ‘50 percent + 1 share’ rather than the reactive possibilities of a “golden share,” he said.

Schubert also warned that “those businessmen who have benefited from previous privatizations should not be allowed a look-in with the new round… [due to] already excessive concentration of business power in Russia.”

Under Russian law, money from the sale of state assets will be turned over to the federal budget.

The total receipts from privatization are expected to be around US$214.28 billion from the 2012-2016 period. The present projected budget program for 2012-14 foresees annual privatization receipts of US$10.714 billion. The latest three-year projections for the Federal budget suggest that the deficit is not a particular problem, with little macro-economic imperative to quickly privatize.

The deficit is projected to be 719 billion rubles (1.3 percent of GDP) this year; 1.570 trillion (2.7 percent of GDP) in 2012; 1.744 trillion (2.7 percent of GDP) in 2013; and 1.648 trillion (2.3 percent) in 2014.

Schubert supposes a budget deficit is not necessarily a good reason for asset sales.

“It partially depends on the nature of expenditures — i.e. are they current or capital. Sometimes, it may be better to borrow and retain the assets – with resultant little or no change in net state assets,” he said.

In Russia, only eight months remain before the vote, and no serious candidate has cast his hat into the ring, which makes future economic policy uncertain, and may delay the implementation of privatization despite Dmitry Medvedev’s attempts to hurry-up the procedure.

“Even if privatization will be implemented, it is still difficult to have a major impact to the economy,” said another economist, Feng Yujun, with the China Institute of Contemporary International Relations, adding that “Russia’s economic structure is the formation of long-term development.”

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