Russian budget sees little if any privatisation revenues

Russian budget sees little if any privatisation revenues
By bne IntelliNews September 19, 2017

The new Russian three-year 2018-2020 federal budget currently being drafted by the government has less than RUB10bn ($172mn) per year worth of privatisation revenues planned, Interfax said on September 18 citing the Finance Minister Anton Siluanov.

Recent reports suggested that Kremlin is determined to push the reform momentum in the election year of 2018, with the government setting an ambitious growth goal of over 2% GDP for 2018-2020.

However, with the privatisation revenues cut, the reform agenda no longer sees cutting the state's solid share in the economy as a prerequisite for reforms. The target is well down on the ambitious RUB1 trillion that was named as the target in 2008 when the then president Dmitry Medvedev restarted the privatisation programme. Since then the state has failed to sell any of the blue chip names on the original list. The most it managed was a dodgy sale of a 19.5% stake in Rosneft to oil trader Glencore and the Qatar Investment Authority (QIA) for €11bn in December 2016 that turned out to be more of a complicated loan than an actual privatisation. Since then Rosneft genuinely sold a 14% to China Energy Company (CEFC) for $9.1bn in the biggest deal with a Chinese investor of its kind. 

The numbers now reportedly budgeted for state property sales for 2018-2020 are much lower than previously budgeted RUB60bn (€940mn) to RUB300bn, which was already seen as very modest and had major assets removed from the privatisation list.

Nevertheless, the Minister of Economic Development Maxim Oreshkin commented that negligible privatisation revenues were only due to the budget following a "conservative scenario" and that the "vector of lowering the state's share in the economy is maintained."

Upon his appointment Oreshkin voiced an entirely different position, telling the Financial Times in January that “if you simply privatise a large state-owned company that dominates a particular market, you won’t improve the competition situation and there won’t be a significant positive impact on growth.” 

Oreshkin is rumored to be Kremlin's new economic policy favourite and may have benefited from proposing a reform agenda that goes slow on easing the grip of pro-Kremlin elite on the economy. 

The controversial arrest of ex-Economics Minister Alexei Ulyukaev, a prominent liberal market advocate, on bribery charges in the Kremlin-approved purchase of state oil company Bashneft by state oil giant Rosneft was seen by some as an attempt to torpedo the role of his ministry in pushing the privatisation agenda.

Another proponent of privatisation is the influential ex-finance minister Alexei Kudrin, who last year was invited back into Kremlin policy-making circles and has continuously argued that reducing state’s role in the economy is a key reform.

Russia has held several rounds of privatisation since it introduced the free market in 1992. Many of the country’s choicest assets went to their managers in the initial and highly corrupt initial “voucher privatisation” phase, with further attempts to sell off state property through the 1990s and 2000s, some of which were reversed.

As the reserves shrank and the budget buckled under pressure from low oil prices and Western sanctions over Ukraine since 2014, the government last year launched a new drive to sell stakes in state companies, starting with the successful sale of 10.9% of diamond major Alrosa for $814mn in July.

Other companies slated for eventual sale include Sovkomflot, Aeroflot, Russian Helicopters, VTB Bank, and Sberbank, although the willingness of the government and Kremlin to part with these is seen to be waning as oil prices recover.

Privatisation frontrunner Russian maritime shipping major Sovcomflot might not be privatised in 2017 after all, Vedomosti daily reported on September 4 citing unnamed sources. In March, Oreshkin said that Sovcomflot could be privatised in the first half of 2017, while promising a deal for a wide circle of investors including both existing and newly issued shares. More recently the government said that it might sell a stake in Sovcomflot to the Chinese in the same way they bought a stake in Rosneft.

CEO of VTB Bank Andrei Kostin also said recently that the privatisation of a stake in VTB would not happen soon due to adverse market conditions.

State-owned companies accounted for about 70% of GDP in 2015, according to the estimates of the Federal Antimonopoly Service (FAS) that in a report to the Kremlin argued that the state itself is the main impediment to Russia's competitiveness and that the market share of state-controlled and municipal companies and their new acquisitions should be limited.

 

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