Russia postponing privatization of oil companies

The Russian government has decided it will postpone the privatization of Bashneft, one of the country's largest oil companies, from the previously scheduled period of September-October 2016 to a later date, stated Igor Shuvalov, Russian First Deputy Prime Minister.

The government also has not received any applications for purchase of 19.5-percent shares in Rosneft, Russia's largest oil company, either from Russian or foreign players, reports the RBK business daily, citing sources among the Cabinet of Ministers. According to the publication, it is unlikely any deal will happen in 2016.

"The strategic reason for postponement of the privatization is the weak situation on the oil market and the foggy possibilities of attracting private investors," said Sergei Khestanov, advisor on macroeconomics to the general director of Moscow-based brokerage firm ‘Otkrytie Broker’.

The price is wrong

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Shuvalov said there were real buyers for the Bashneft package, among them Russia's largest private oil company Lukoil, Rosneft, and the Independent Petroleum Company (IPC), owned by former Rosneft president Eduard Khudainatov.

While Ernst & Young has estimated the state package in the oil company to be worth 306 billion rubles ($4.8 billion), Rustem Khamitov, governor of the Bashkortostan Republic, where Bashneft operates, believes the estimate falls short and that the state package can be sold for more money. He has already sent a petition to Russian President Vladimir Putin.

The state is counting on getting at least 700 billion rubles ($10.9 billion) for the 19.5 percent stake in Rosneft.

"The reason for postponing the privatization of Bashneft is likely related to the fact that the government and the potential buyer did not agree on the price. The main contender for Bashneft's package is Lukoil," said Stanislav Verner, vice president of the ICF Financial Centre.

From the viewpoint of competition and achieving the government's goal to reduce debts in the economy, this was the best option, he said, but Lukoil did not find the price the investment consulting group proposed suitable and refused to pay.

"The decision to postpone privatization could have arisen out of the fact that Lukoil and Rosneft engaged in a hot battle over the assets," said Anastasia Ignatenko, an analyst from the Moscow-based financial consultancy TeleTrade. Earlier, Lukoil boss Vagit Alekperov said that the price for Bashneft was too high.

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The government over a barrel

The problem for the government lies in the fact that the sale of Rosneft and Bashneft shares has been factored as the main condition for the Russian 2017 state budget to be drafted with a 3 percent deficit of GDP.

Khestanov believes there are two ways that the budget can still be drafted with a 3 percent deficit without privatizing the companies. First, reduce government spending, and second, use the reserves. It is likely both options will be used for the budget exercise.

"It is useless to wait for the situation in the oil market to change in the remaining months of the year, but the plan to contain the budget deficit at 3 percent of GDP nevertheless has to be implemented," warned Verner.

This means, said Verner, the government would have to make a compromise between the price and the rights that the strategic Asian investors will get when they buy Rosneft shares. Earlier, Chinese investors had said they were interested in the deal only if could be part of the management of the company.

If privatization is postponed, it is unclear with what the 2017 budget will be filled, said Ivan Kapitonov, professor at the Russian Presidential Academy of National Economy and Public Administration. He said the budget deficit would probably rise from the planned 3 percent to 5 percent.

In such a situation, an alternative could be the weakening of the ruble: With a lower ruble exchange rate the budget will be able to acquire more resources from oil and gas sales in dollars, said Kapitonov.

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