Around a year after the Russian government announced it planned to embark on its biggest privatisation drive since the disposal of assets following the collapse of the Soviet system, an approved list of companies in which stakes will be offered between now and 2015 was published by the Economic Development Ministry on November 17.
Whilst the host of blue chips in energy, banking and infrastructure on the list are likely to have investors licking their lips, it's not yet cut and dried. Indeed, the programme looks to be reigniting the long-running rivalries inside the Kremlin that the financial crisis had pushed to the background.
Just which companies will feature on the final list has been a matter of some debate since the new privatisation drive was announced in November 2009. "It's exciting," says Kingsmill Bond, chief strategist at investment bank Troika Dialog. "Whilst some of the biggest names, like VTB or Rosneft, are really only further share sales, the key names are the infrastructure companies like Russian Railways and Sovkomflot."
The privatisation drive is a key test of the government's resolve to carry out President Dmitry Medvedev's modernisation campaign, especially since the state massively increased its holdings in the country's major corporations via bailouts during the global economic crisis. However, just like Washington and London, Moscow has insisted from day one that those increased stakes are only temporary.
Further, should the sell-off proceed in full, it will suggest that the deficiencies in the Russian economy exposed by the crisis have genuinely forced a change in mindset at the top and tipped the scales in favour of the liberal programme that has been fighting for prominence over the last decade.
In September, Finance Minister Alexei Kudrin - the biggest hitter in the liberal faction - warned of the forthcoming battle when he insisted that the government is ready to force wide-scale privatisation past vested interests, particularly on the part of the powerful heads of the biggest state corporations, who enjoy close ties with senior officials. "The main thing is that the government wants to do it," Kudrin stated. "They [the managers] will not get out of it, because it is not those officials that make the decisions, but the government."
Reasons to sell
The motivation to sell is two-fold. On the one hand, the cash (as much as RUB2 trillion, or $60bn) that the government hopes to raise will help reduce the budget deficit. Perhaps more importantly, however, the plan is that private investors will bring international managerial practices and technology to upgrade Russia's largest corporations and economy.
As analysts from investment bank VTB wrote on seeing the list: "The approval of the privatisation programme cements the momentum... [whilst comments from the economy minister] indicate that [it] is seen... not solely as an exercise in funding the fiscal gap, but as a capital raising and structural reform initiative."
The appearance of the list was clearly a relief for those worried that vested interests would try to resist the drive. In fact, just a couple of days before it was released, business daily Kommersant reported that the economy ministry had, just a week before, proposed stripping out the blue chips and slashing the programme's target income to just RUB16bn.
Still, doubts will remain until each sale actually goes through, with a host of chief executives already seeking support for a delay on selling shares at their companies. With the programme stretching over the next five years, there's still plenty of room for manoeuver. "There's clearly still resistance to parts of the programme," says Bond, "but it's important from an ideological perspective that after the increase in state holdings during the crisis, the programme is going forwards and the list is now out."
Certain officials have already moved to support the resistance, offering glimpses of the long-running rivalries between the siloviki, a Kremlin faction with ties to the security services, and the more liberal elements in the Kremlin bubbling back to the surface. That's perhaps not surprising. These opposing forces were forced to put their differences aside for the most part over the past couple of years as the country fought to put out fires (sometimes literally). The crisis exposed the cracks in the economy, and stunned a ruling elite that had confidently assured itself that their power vertical, backed up by Kudrin's ring-fenced slush fund from oil, would insulate Russia.
This offered fresh impetus to those who had been warning of the danger posed by the status quo, encouraged Medvedev in his (vocal) crusade to liberalise the country and modernise the economy, and produced a sudden change of direction in foreign policy that professed to have pragmatism at its core; one which saw relations with the US and Europe "reset."
However, it's not been until now, as the recovering global economy offers the liberal cohorts the opportunity to push ahead with their agenda, that the status quo in the country's largest money-spinning corporations has been challenged. No wonder the friction is back.
The internationally respected Kudrin is leading the fight, with ever-more-frequent public statements pushing the sell-off programme forwards recently. Indeed, in November, he suggested that a second round of privatisation starting after 2013 could even see the government relinquish controlling stakes of some of the biggest assets.
The size of the challenge this would present to the status quo can't be over-estimated. It would open up the potential for the giants of Russia to ditch the strategic national interests that tend to inform their directors now, to act purely in commercial terms instead. Given such ambition, Lilit Geovargyan of IHS Global Insight suggests that resistance from company mangers is only to be expected. "Privatisation of shares will bring uncertainly and changes for management depending on the size of sold shares, of course. Hence, there is a natural resistance to change."
As Bond points out: "They'll have to be clearer on dividends and improve corporate governance if they want to attract strong prices."
Officials at the forefront of resistance include those involved with the transport infrastructure sector, which is heavily represented in the list of companies facing privatisation in a bid to substitute a much-needed $1-trillion investment plan derailed by the financial crisis.
Transport Minister Igor Levitin has supported calls for delays to privatise flag-carrier Aeroflot, as well as its home hub Sheremetyevo Airport. The hawkish official has even moved to dampen expectations over the size of stake that Russian Railways could offer, despite more positive noises from Vladimir Yakunin, CEO and a close ally of Prime Minister Putin.
At the same time, the Ministry of Energy said in late October that it supports a proposal from MRSK Holding to extend a moratorium on privatisation of the country's electricity distribution companies that finishes at the end of the year. "It is something of a paradox for us," wrote Vladimir Sklyar of VTB at the time, "that senior ministers in the Russian government frequently cite the well-known inefficiency of state-run enterprises as a reason to speed-up privatisation while, as here, other senior figures cite state control as some kind of panacea. Uncertainty over future pricing in the generation markets did not stop Russian generating companies from being privatised in 2007-2008."
It's worth noting that Deputy PM Igor Sechin, a central figure amongst the siloviki, moved to take control of a slice of the power market during the cabinet reshuffle that accompanied Putin's move into the PM's chair in 2008 - a reshuffle that essentially saw a balance of hawks and liberals occupying the various ministries with the PM as arbiter. At the same time, Energy Minister Sergei Shmatko is said to have supported Transneft CEO Nikolai Tokarev in earlier battles with Sechin's first love: Rosneft.
Tokarev is in fact the only one of Russia's state-corporation chiefs to have managed to get his company officially pulled off the list, although given that the oil pipeline monopolist has perhaps the most strategic role of all Russia's giants, that may not have been the toughest of tasks, especially with Sechin in charge of the state's energy policy.
Meanwhile, Chris Weafer of Uralsib notes that there was no mention of the state's 20% equity stake in Novorossiysk Seaport, which had previously been mentioned as a sale candidate for 2011. Instead, the terminal for Russian crude exports via the Black Sea is at the centre of a deal that will essentially see it nationalised under the control of Transneft. "Investors, concerned about the effect of [that] deal... had considered the possible privatisation a comfort factor," Weafer warned in his note.
However, given the encouragement that the economic crisis and Medvedev offered to liberal forces over the past couple of years, the hawks are having to choose their battles. As Geovargyan points out: "When it comes to arguing against privatisation and pushing for state ownership, with the all ensuing perks, the so-called siloviki will find it easier to argue their case when it comes to companies that are strategically important for the nation. Transneft and Russian Railways fit this category."
"Russian Railways have argued that, being an important infrastructure company, privatisation may drive the company into choosing commercially attractive projects over the ones that are important for the state and public, and hence privatisation should be more carefully done and at least delayed until 2013. Less strategic businesses find it more difficult to make the same argument," she says.
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