Ovanes Oganisian of Renaissance Capital -
On July 11, Prime Minister Vladimir Putin met with academicians and President Dmitry Medvedev met with oligarchs and businessmen to discuss upcoming privatisations, the investment climate and the lack of long-term funding, as well as to discuss economic strategy. The views of the two groups were expected to be the exact opposite of each other, reflecting the deep division on these topics in Russia; the privatisations of the 1990s are still being questioned, and a manually managed and centrally planned economy might still appeal to a majority of the population.
Academics in Russia, as in many countries, are heavily dependent on government funding, and therefore tend to view the state's role in the economics of the country as exaggerated. During the meeting, which was chaired by Putin and also attended by Finance Minister Alexei Kudrin, they voiced their concerns about the upcoming privatisation, stating that it wasn't a quick fix. Instead, they offered the familiar remedies of Soviet-style micromanagement of key enterprises and the provision of long-term, cheap financing on a case-by-case basis to modernise key plants and sectors. At the same time, they advocated additional spending to create new domestic industries specialising in nanotechnology, allowing Russia to occupy this new technological niche.
In our view, the opinions of the academics have been largely addressed by the current economic reality of Russia, which, under Putin, has been transformed into a symbiotic free market and Soviet-style managed economy, with prices set by the government in many sectors. The privatisation of key infrastructure monopolies, such as Gazprom, Transneft and Russian Railways, is not on the cards in the near future. Russian VEB has been acting as a development bank, providing cheap funding during the crisis to the 295 key companies on the government's list, and is on track to lunch a programme to finance PPP projects in Russia. Finally, Rusnano Corporation, headed by Anatoly Chubais, is gradually gaining experience and knowledge, and is securing projects to ensure Russia has a competitive advantage in certain new industries, such as nanotechnology.
During Medvedev's meeting with businessmen and state-owned company barons, the opinions heard were quite the opposite. Medvedev addressed the key issues of his plan to improve the investment climate in Russia, the so-called Magnitogorsk thesis. Medvedev has criticised the slow pace of privatisations in Russia. According to the current plan, the government will retain controlling stakes in key enterprises until at least 2016. Medvedev has been pushing for more aggressive privatisations and he expects to see a new plan by August 1. He also said that he expects to see the creation of legislature that limits the government's ambitions in strategic sectors.
Various commentaries on the Medvedev meeting have been supportive of privatisation. It was evident that improving the current investment climate was very important to the interests of the audience, and there were numerous suggestions on how to do this. Interestingly, the meeting was also attended by Mikhail Gutseriev, president of Russneft, who has recently returned from London where he had been in hiding after an attack on his business. However, no invitation was sent to Dmitry Kamenshik, CEO of Domodedovo airport, who recently cancelled the company's IPO.
Meanwhile, the August deadline for the government's privatisation programme, set by Medvedev during the St Petersburg investment forum, is drawing near. Vedomosti leaked information on the companies that are to be privatised according to the new Ministry of Economic Development programme.
According to the leaked programme, the state will reduce its stake to zero in two key assets, Rosneft and Rushydro, whilst retaining a golden share in each; it will reduce its stake to zero in 11 enterprises, including VTB; and it will retain a stake of 50% +1 share in six other key enterprises, including Russian Railways, Transnet and MRSK Holding. The current plan for Sberbank as we understand it is to sell a 7.5% stake, and there was no mention of the government lowering its stake to zero in the Vedomosti report. The combined value of the shares to be sold is at least $110bn. An ambitious target to complete by 2017, in our view.
Russia is turning away from state capitalism to improve its investment climate, which we believe is just another way of saying it is turning away from state socialism. Russian state-owned companies currently operate with the unfair advantage of having access to much cheaper capital than their private competitors, skewing competition as a result. Moreover, the Russian state is not trying to amend this situation, which it could do by requiring dividends from state-owned companies to balance the skewed cost of capital. Therefore, we think privatisation is the best solution to this problem, as it will end the disadvantages felt by private companies, and it will also make it much easier for the government to draw higher fiscal revenues from the newly privatised companies, financing the current and any future deficit. Finally, privatisation revenues could provide a cushion if oil prices drop.
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