Strategic packages: Privatization plans and challenges

In early July, Prime Minister Dmitry Medvedev signed a decree that marks the actual start of a new, three-year program of privatization of federal property.

At the moment, the state is a shareholder in 2,337 companies—1,256 of these are entirely under government control (100 percent of the shares). In 100 companies, the government owns between 50–100 percent of shares. In 227 companies, the state controls 25–50 percent of shares, while, in 754 companies, it holds 25 percent or less.

The state also fully owns 1,795 federal state unitary enterprises. According to the approved program for 2014–2016, the plan is to privatize 436 companies and 514 federal state unitary enterprises. The government expects that, by 2016, it will complete the process of exiting non-oil sector companies that are not related to resource monopolies and the defense industry.

Government exit

Most of the companies in which the state has a stake are concentrated in agriculture (225), construction (145), wholesale trade (123) and publishing (116).

In addition to small enterprises, the government plans to privatize more: In 2014–2016, the state should completely withdraw from the capital of Rostelecom, Rosspirtprom, RUSNANO and the United Grain Company.

In regards to the development of Moscow airports, the government intends to terminate the usage of its capital by Sheremetyevo International Airport, Vnukovo Airport and Vnukovo International Airport.

Related topic: Privatization

By 2016, the government also plans to reduce state participation to 25 percent plus one share in the companies Aeroflot, Sovcomflot and Alrosa. In the case of diamond mining giant Alrosa, it is not just about reducing the package in the federal government, but also reducing the packet belonging to the Republic of Sakha (Yakutia).

The state will reduce its involvement in RusHydro and VTB Bank to 50 percent plus one share. The government also intends to reduce its stake in Rosneftegas capital Rosneft up to 50 percent plus one share. Up to 75 percent plus one share of state ownership is planned to be reduced in Transneft and Russian Railways.

By 2024, the state must reduce its share in the United Aircraft Corporation to 50 percent plus one share and, in the United Shipbuilding Corporation, up to 75 percent plus one share.

This is perhaps the most ambitious privatization program since the 1990s.

Privatization strategy 

Transfer of the company to private hands in the Russian system of governance does not mean a loss of state control.

"Property in Russia is conditional,” says the head of the National Strategy Institute, political scientist Stanislav Belkovsky. “And to change owners is not much more complicated than [changing] the state-appointed managers—just that it will require investigating authorities, prosecutor’s office and the courts.”

Meanwhile, Medvedev's privatization plans are not highly trusted.

In 2008, on the eve of his inauguration, newly elected President Dmitry Medvedev said in an interview with Financial Times that the policy of privatization would continue under him.

Rosneft privatisation gets green light

Throughout the years of his presidency, there was talk of the need to reduce the state's share in the economy—but the share only increased. At first, the crisis was to blame, and authorities said that the government and state banks had to come to the rescue of the distressed private sector. Later on, the acute phase of the crisis passed, but the purchase of assets continued.

Anti-privatization?

In the first half of 2013, the private company TNK-BP completed the purchase of state-owned company Rosneft, the state bank VTB bought the fourth-largest mobile operator Tele2 Russia, and the former’s subsidiary, VTB Capital, acquired a stake in Tricolor TV—the largest satellite TV provider in the country.

Yet the most revealing were the events of spring 2012. On May 21, newly approved Prime Minister Dmitry Medvedev instructed the government to speed up the privatization of state-owned companies, calling it a priority. The next day, President Vladimir Putin included Rosneft, RusHydro, FSK and Holding IDGC on a list of strategic enterprises, placing a de facto ban on their privatization.

Currently, Rosneft and RusHydro appear on the government’s new privatization list for 2014–2016.

Discount for patriotism

The highest barrier to the privatization of state-owned companies was a ban on the placement of their shares on foreign stock exchanges. In October 2012, this patriotic initiative was created by the head of the now liquidated Federal Service for Financial Markets, Dmitry Pankin.

The idea has since caused confusion by its uneconomical character, but, in January 2013, at a meeting on the development of the stock market, Putin spoke about the introduction of the ban as a long-ago decided issue.

In February, the head of the Expert Department of the Presidential Executive Office, Kseniya Yudaeva, confirmed that all of this would happen and Russian state-owned companies would remain located within the country. Although, according to the same Expert Department, in 2010–2012, only 20 percent of the outstanding shares of domestic companies are accounted for by the Moscow Stock Exchange.

By imposing restrictions on the placement of state-owned companies on international markets, the government actually privatizes them on worse conditions and at a low price; the budget receives less revenue as a result.

Thus, in late June, the estimates of the Federal Property Agency and Ministry of Economic Development were adjusted: The 2014 budget from the sale of state assets should receive 180 billion rubles ($5.5 billion), instead of the projected 230 billion rubles ($7 billion). Similarly, in 2015, the budget will receive 140 billion rubles ($4.3 billion), instead of 445 billion rubles ($13.7 billion).

Official explanations of the limitations on state-owned companies abroad cite the need to stimulate the development of the domestic stock market and the plans to turn Moscow into an international financial center.

Still, so far, the purpose of this seems so fantastic that it is hard take this as an explanation.

First published in Russian in Kommersant Dengi

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