MOSCOW BLOG: Kremlin almost doubles privatisation target to $50bn by 2015

By bne IntelliNews September 17, 2010

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The Russian government has doubled the target to be raised from selling off state assets over the next five years to $50bn, Deputy Prime Minister and Finance Minister Alexei Kudrin said on Wednesday, September 15.

Russia, like so many other countries around the world today, has restarted its privatisation programme in an effort to plug its first budget deficit in a decade. The list of companies on sale has been lengthened and their total value increased from the earlier target of $29bn that was supposed to be raised by 2013, although Kudrin didn't name which new companies had been added to the list. The original list included Rosneft, Russian Railways, the Federal Grid Company and RusHydro. "We will have a privatization programme for approximately five years, worth around $10bn a year," Kudrin was quoted by newswires as saying.

Yury Solovyov, head of VTB Capital, a state-run investment bank and likely organizer of the deals, told the Moscow Times earlier in the week that two privatisation transactions could happen this year, in the infrastructure and financial sectors.

There has also been an increasing amount of noise surrounding the possible sale of stakes in the state's two biggest banks, Sberbank and VTB Bank. Deputy Finance Minister Alexei Savatyugin said on September 2 that it was toying with the idea of selling 10% of VTB Group before the end of this year. The government has already sold a 25%-1 share in the bank in a disastrous IPO. And German Gref, chief executive of Sberbank, said a week later that the state may sell a 9.3% stake in Sberbank next year to help cut the budget deficit. Sberbank has a market capitalization of $58bn and it and VTB were both included in the original privatisation programme that runs to 2013.

The Finance Ministry is also seeking by 2013 to sell a stake in state-owned Russian Agricultural Bank, known as Rosselkhozbank, Savatyugin said. Russia may sell up to 49% of shares in the bank, in which the state owns 100%.

Sold over objections

Kudrin also promised the sales would go ahead despite any resistance from the managers of these companies, many of whom are powerful and treat their companies as their own personal fiefdoms. Kudrin said the government has the political will to push any of these sales through - something that remains to be seen. "[The managers] will not get out of it, because it is not those officials who make the decisions but the government. The government has, on the whole, decided on this issue... I do not think that the opinions of individual managers will change the government's position," said Kudrin.

The privatisations will be a key test of the government's resolve to carry out Russian President Dmitry Medvedev's modernisation campaign. Nearly one in two Russians now work for the state or state-dependent companies following the crisis, where the state increased its stakes in many large enterprises to prevent them going belly up. The Kremlin has said from the beginning that these positions were temporary and that it wants to wind down its ownership as the market recovers.

However, the organs that control these stakes are unwilling to sell them just yet. For example, Vneshekonombank (VEB), the state-owned debt agency that holds stakes in both European aircraft maker EADS and Russia's biggest aluminium maker RusAl, said in September it doesn't want to sell either stake yet and will hang on to them "for profit."

The government relied on VEB during the crisis to help Russia through its worst recession in 15 years by buying stocks and refinancing corporate debt to prevent the bankruptcy of big companies and consequent job losses, including a $4.5bn credit to RusAl. "We have no right to quit this investment [in RusAl] with a loss," VEB CEO Vladimir Dmitriyev said, referring to the state development bank's charter. "For a strategic investor, which we consider VEB to be in RusAl, this time is not sufficient to make quick conclusions."

So the battle lines are being drawn and objections like this are serious, because despite what Kudrin says about political will, it seems the government won't be able to simply order the sale of stakes when it wants to without jumping through some legal hoops first.

And the government needs the money. At the start of this year Kudrin said that he was going to freeze spending for the next few years as he struggles to reduce the budget deficit. However, with crucial presidential elections looming in 2012 - the speculation since the last elections is that Prime Minister Vladimir Putin will come back as president - the state will clearly want to increase spending.

Putin said as much on September 14, though this was as much to do with propping up the economy wounded by this summer's fires as any populist spending ahead of the vote: IHS Global Insight said in a note that the economy was on track to meet their 5.2% growth target this year until the fires, which "took a healthy bite out of growth in the third quarter and growth for the full year will come in at the same 4.2% achieved in the first half."

Borrowing at home

As the debate rages around the world over what to do next - the US says their economy needs more stimulus, while the Europeans say it is time to reign in spending and start dealing with their debt and deficits - Russia has been on the side of reducing debt and deficits (not that it has anything like as big a problem as the developed world). But both the privatisation plan and Kudrin's hints that spending will be increased shows the Russian economy is still having a tough time - hard enough that the Kremlin believes it needs more shots in the arm.

Nevertheless, most of the extra money will come from domestic resources. The Ministry of Finance has switched from relying on the international credit markets to raise the necessary money to the domestic market. Putin signed a ruling in September to officially cut the upper limit of government Eurobond offerings in 2010 to $7.5bn from $17.8bn, making official something everyone had already assumed was the rule. Russia offered a very successful $5.5bn Eurobond earlier this year - its first issue in a decade - but by the time the bonds were sold the state had already made up its mind that didn't want to finance the deficit on the international markets. The whole issue became a benchmark-setting process, as the Kremlin went into the process specifically (and it said this out loud) to get the tightest spreads it could.

The benefits of the tight spreads is that now the ball of international borrowing has been tossed over to the private and semi-sovereign companies, which are now coming to market with bond offers that should be significantly cheaper than they would have been if there had been no sovereign issue this year. Sberbank, VTB Bank and Gazprom have all said that they are likely to go to the international market with billion-dollar issues in the next 12 months.

Alfa Bank also said mid-September that it wants to issue between $500m and $1bn of Eurobonds in what will be the first bank Eurobond issued since the crisis. If this goes ahead, then it would be an important milestone on the road to recovery for Russia's banking sector as much for the consumer lending business, which has driven growth in recent years and been financed with wholesale borrowing from the international capital markets. Consumer credits were frozen once the banks were cut off in 2008 from their main source of capital to refinance loans, so new bank Eurobonds should feed through into new consumer borrowing and restart the virtuous circle of spending-profit-investment-wage increases.

On the flip side, the other part of Putin's orders on borrowing was to increase the ruble bond issue limits for this year from RUB869.295bn to RUB1.243 trillion. At the same time, the Kremlin is going to innovate and issue the first ever ruble-denominated Eurobond that can be bought by international investors on international markets. Russia has signed off on Article 8 with the International Monetary Fund and the ruble is now a freely traded currency; although international payment systems like Euronext are set up to trade the ruble in the same way as the dollar or euro, very little trading goes on. But all the infrastructure is in place for ruble Eurobonds and this will help the Kremlin raise money and also extend its policy of adding the ruble to the international basket of non-dollar reserve currencies.

In September, Deputy Finance Minister Dmitriy Pankin announced that the government's 2010 domestic borrowing programme would be revised downward, as the Kremlin clearly intends to shift the burden of Putin's increase in overall ruble borrowing to the new Eurobonds. Currently, the plan is to sell up to $3bn worth of ruble-denominated Eurobonds with maturities of up to five years.

Still, despite these borrowing plans, clearly the "Mr Prudence" Kudrin feels he is short of money and wants to make a big dent in the deficit than he could from simply borrowing on the domestic market, hence the significant increase in the privatisation programme.

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