Russian Government Wants to Speed up Privatization

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Mar. 8 – The Russian government is planning to ask investors what assets they would like to buy from the state, an idea proposed by First Deputy Prime Minister Igor Shuvalov to speed up privatizations.

Shuvalov said in September that the state was planning to step up asset sales. The government wants to hear investors’ thoughts on the state’s possible offers, said Alexei Uvarov, director of the property department of the Economic Development Ministry. “We’d like to know everything down to the details — what sectors of the economy investors are most interested in, what specific companies and stakes they would like to obtain.”

The request for input will be used down the road, he stressed. “We’ll be taking into account investors’ advice when preparing the privatization plans for 2011and the following years,” Uvarov said.
The Economic Development Ministry is now independently picking out assets, and the privatization plan has not always been successful, the government source said to daily Russian business paper ‘Kommersant’. “The government is planning to sell the state’s stakes in major companies in the coming years, and by speaking with investors, we can understand whether the assets will be in demand or whether it’s better not to rush,” the source told Kommersant.

The plan was met with skepticism from the business community, however.

“I don’t think investors will believe in the sincerity of the government’s call, so it’s doubtful they’ll give a meaningful response,” said Anton Danilov-Danilyan, head of ‘Delovaya Rossia’s’ expert council and a former head of the Kremlin administration’s economic department. “They’ll most likely take it as an attempt to collect information probing their business interests.”
The idea would, however, improve the channel for communication between the state and business, said Andrei Bugrov, managing director of Vladimir Potanin’s ‘Interros’ holding. “If such a window existed now, we would probably study the list of assets for a possible deal,” he said, without naming specific assets.

It doesn’t take any detailed analysis to determine that investors will be most interested in the sectors with the highest profits, such as the raw materials sector, Danilov-Danilyan said. “No one is going to want to buy the processing companies or high-tech companies of yesterday.”

Above all, the state must privatize the oil and gas sector, while setting strict rules for investors, such as requiring investment to develop fields and supplies to the domestic market, said Pavel Fuks, chairman of the developer Mos City Group. The state should retain a golden share to make sure the company’s obligations are met, he said.

The power and energy sector and banks are the most interesting assets for privatization, said an executive at a Russian subsidiary of a global investment bank. But the banker doubted that would happen. “More likely, the government will limit itself to lowering its stakes in companies without losing control over them, while investors will really only be allowed to privatize the ‘candlestick makers,” Fuks told Russian business paper Vedomosti.

The state’s assets include Rosneft (75 percent), Gazprom (50.002 percent), Transneft (100 percent of voting shares), Russian Railways, Sheremetyevo, Sovkomflot (all 100 percent), Aeroflot (51.2 percent), Alrosa (50.9 percent), RusHydro (60.4 percent), Inter RAO (57.3 percent) and the Federal Grid Company (77.7 percent).

The majority of companies in the power sector were privatized in 2007 and 2008, while the state can only legally sell small stakes in what it still owns, such as 2.7 percent of the Federal Grid Company.
The most interesting assets are the blue chips and shares in infrastructure companies like Sovkomflot and Russian Railways, said David Herne, director of the fund Halcyon Advisors.

There has been so much concern in recent years that Russia might renationalize companies that the best proof of the opposite would be further sales of leading blue chips, such as Rosneft, Sberbank and VTB, said Jacob Grapengiesser, director of the Swedish fund East Capital. He said the most interesting decision would be privatizing Transneft, which meets the criteria of investment guru Warren Buffett, who recommends infrastructure companies with growth potential.

The government plans to earn 18 billion rubles ($600 million) by selling state property this year. The plan for 2011 and 2012 is 6 billion rubles and 5 billion rubles, respectively.

Once President Dmitry Medvedev signs an order decreasing the number of strategic enterprises, the revenue from privatizations will reach 72 billion rubles as the state sells off stakes in sea and river ports, steamship operators and shipping companies.

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