03.06.2011, 09:50
Russian Privatisation: More Than Just Fundraising? (World Review)
OREANDA-NEWS. June 03, 2011. In December last year the Russian government approved a privatisation plan for 2011-2013, including the top ten state-owned assets, which could bring an extra 1 trillion rubles (USD 33 billion) to the state. In mid-February this year the government began privatisation by selling a 10% stake in VTB Bank, Russia’s second largest bank. The Government emphasises that the privatisation is aimed at reducing the state's "excessive” presence in the economy, boosting productivity of state enterprises and continuing fight against corruption. “The privatisation should not just be a fiscal matter and not so much oriented toward raising funds for the budget, although that's also important,” said Elvira Nabiullina, Minister of Economic Development of Russia. "It is, in large part, a way for us to influence the structure of the economy.” In this article, Ilya Fedotov, Head of Equity Research at Veles Capital IC, discusses the reasons and possible outcomes of the privatisation and gives his opinion on whether the Government will succeed in changing the structure of Russian economy through selling off the stakes in state-run enterprises.
In my opinion, the decision to privatise large state companies stems from a boringly obvious reason – Russia’s budget deficit. Due to the high inflation rates and sharply increased government spending, even high oil prices do not bring the budget to a surplus. From the year 2000 until the crisis in 2008 the Russian budget was in surplus even despite the lower than now oil prices. As of now, according to the Ministry of economic development, the budget will stay in red even if oil prices go up to USD 105 per barrel.
In this situation, the government has a number of ways to decrease the deficit. The first one is to weaken the Russian ruble, which is undesirable because of the resulting high inflation. The second way is to increase borrowing, internal or external. This is more preferable, but does not solve the problem of lack of finances, as the government will have to repay the debt. The third way is to privatise state-owned companies. By following this option, the government kills a few birds with one stone. Firstly, according to this new privatisation plan, only minority stakes are offered for sale, which means that the government will remain in control and continue to manage the companies, to impose various social responsibilities and to, sometimes, ignore the minority shareholders opinion. At the same time, the government receives the funds needed to decrease the budget deficit without the need to repay later. Also, this step improves the image of state-owned companies and their transparency because such actions seem to be well-perceived by the investment community and usually lead to the growth of capitalisation. Nowadays, in Russia there are many cases of violation of the minority shareholders rights by state-owned companies through, for example, dilution of minority shares, or concluding economically inefficient and politically motivated deals, etc.
Let us try to define potential investors by excluding the groups who will not take part in privatisation. Russian private investors are most likely to avoid participation, because, firstly, this is a too small group (just a few percents of population), and, secondly, many of them have had a negative investment experience with MMM in 90th and VTB in 2000th. Russian corporate investors might be interested, however their demand seems to be very selective because of their business mentality – Russian business prefers to be a majority shareholder rather than a portfolio investor. In addition, the richest companies, who might be interested in taking up larger stakes, are the stateowned companies anyway, so privatizing this way will mean just moving money from one pocket to another. Foreign institutional investors will hardly participate in this process by reason of Russia’s poor investment climate. As a result, we can mark only two groups of potential investors – investors from Eastern/Asian regions and corporate investors from politically friendly countries, such as Germany and Italy.
In the recently announced list of measures to improve Russia’s investment climate, President Medvedev included instructions to replace state representatives with independent directors to improve the efficiency of management. This, however, will hardly change anything - we see this as cosmetic changes. In our opinion, it is obvious that state officers will be replaced by other loyal persons, so we do not expect substantial improvements in the corporate governance of stateowned companies.
Summing up, we can say that the announced privatisation, in the form it has been declared, as well as the removal of senior officials from the management boards of state-owned companies will hardly ever change the economic situation in Russia. The staterun enterprises will remain the same state-run enterprises with the only difference that their external image will be more attractive until the first antiminority decision is made. Also, in our opinion, these steps only partly help to improve Russia’s investment climate, as they do not bring structural changes. Moreover, these measures are far from fostering economic modernisation: the government will remain the majority owner in the economy and mid-term macroeconomic forecasts are still based on the oil price level.
In my opinion, the decision to privatise large state companies stems from a boringly obvious reason – Russia’s budget deficit. Due to the high inflation rates and sharply increased government spending, even high oil prices do not bring the budget to a surplus. From the year 2000 until the crisis in 2008 the Russian budget was in surplus even despite the lower than now oil prices. As of now, according to the Ministry of economic development, the budget will stay in red even if oil prices go up to USD 105 per barrel.
In this situation, the government has a number of ways to decrease the deficit. The first one is to weaken the Russian ruble, which is undesirable because of the resulting high inflation. The second way is to increase borrowing, internal or external. This is more preferable, but does not solve the problem of lack of finances, as the government will have to repay the debt. The third way is to privatise state-owned companies. By following this option, the government kills a few birds with one stone. Firstly, according to this new privatisation plan, only minority stakes are offered for sale, which means that the government will remain in control and continue to manage the companies, to impose various social responsibilities and to, sometimes, ignore the minority shareholders opinion. At the same time, the government receives the funds needed to decrease the budget deficit without the need to repay later. Also, this step improves the image of state-owned companies and their transparency because such actions seem to be well-perceived by the investment community and usually lead to the growth of capitalisation. Nowadays, in Russia there are many cases of violation of the minority shareholders rights by state-owned companies through, for example, dilution of minority shares, or concluding economically inefficient and politically motivated deals, etc.
Let us try to define potential investors by excluding the groups who will not take part in privatisation. Russian private investors are most likely to avoid participation, because, firstly, this is a too small group (just a few percents of population), and, secondly, many of them have had a negative investment experience with MMM in 90th and VTB in 2000th. Russian corporate investors might be interested, however their demand seems to be very selective because of their business mentality – Russian business prefers to be a majority shareholder rather than a portfolio investor. In addition, the richest companies, who might be interested in taking up larger stakes, are the stateowned companies anyway, so privatizing this way will mean just moving money from one pocket to another. Foreign institutional investors will hardly participate in this process by reason of Russia’s poor investment climate. As a result, we can mark only two groups of potential investors – investors from Eastern/Asian regions and corporate investors from politically friendly countries, such as Germany and Italy.
In the recently announced list of measures to improve Russia’s investment climate, President Medvedev included instructions to replace state representatives with independent directors to improve the efficiency of management. This, however, will hardly change anything - we see this as cosmetic changes. In our opinion, it is obvious that state officers will be replaced by other loyal persons, so we do not expect substantial improvements in the corporate governance of stateowned companies.
Summing up, we can say that the announced privatisation, in the form it has been declared, as well as the removal of senior officials from the management boards of state-owned companies will hardly ever change the economic situation in Russia. The staterun enterprises will remain the same state-run enterprises with the only difference that their external image will be more attractive until the first antiminority decision is made. Also, in our opinion, these steps only partly help to improve Russia’s investment climate, as they do not bring structural changes. Moreover, these measures are far from fostering economic modernisation: the government will remain the majority owner in the economy and mid-term macroeconomic forecasts are still based on the oil price level.
Комментарии