Sovcomflot steers Russia's privatisation programme into stormy waters

By bne IntelliNews July 10, 2013

Ben Aris in Moscow -

Russia's privatisation programme fell into further disarray on July 9 as shipping giant Sovcomflot announced it plans to float a 25% stake on the New York Stock Exchange later this year.

The decision to launch its IPO in the US comes just months after President Vladimir Putin ordered that all of Russia's privatizations would now be held on the domestic Moscow Exchange . VTB Bank dutifully raised $3.3bn in April with the sale of a 10% stake, but few have joined it.

The announcement on the Sovcomflot is just the latest setback for the privatisation programme. The state partially admitted defeat earlier this month by officially scaling back this year's revenue target. However, most of the programme targets announced since it was re-launched in 2009 have been little more than pie in the sky.

Sovcomflot's decision to head to the US followed an agreement between management and IPO organizer, Deutsche Bank. It has already has been approved by First Deputy Prime Minister Igor Shuvalov and the Federal Property Management Agency, an unnamed source close to the Sovcomflot's management told Russian daily Vedomosti. "Most shipping companies' stocks are traded in New York [Stock Exchange], where the demand for such securities is the highest," the source told the paper.

However, in an attempt to save face, the source added that the decision is "not final" and that there is a "good chance" that the IPO will at least partially be held on the Moscow Exchange as well. The stake is currently valued at around RUB10bn ($300m), according to a recent Economic Development Ministry assessment.

Which way is up?

The about turn from the order to list in Moscow is confusing, but there are several reasons why Sovkomflot, a company with global reach and one of the better state assets under the privatisation gavel, might have decided to head to New York.

The VTB SPO in Moscow was successful - but only just, with sovereign wealth funds from Qatar, Norway and Azerbaijan buying the bulk of the offer. In an interview with bne, CFO Herbert Moos called the sale of such a large amount of shares to foreign investors a bureaucratic minefield adding that several legislative changes had been necessary to allow it to happen.

VTB comes with its own in-house investment banking division, which can take care of a lot of the paperwork itself; perhaps the obstacles to listing in Russia were just too daunting for Sovkomflot.

The second issue is the shallowness of the domestic market - there are simply not enough potential buyers. That's why VTB did not concentrate on selling its shares to domestic institutional investors, or Russians planning for their old age, but instead launched the bulk via what was essentially a private placement to three very large investors. Not every privatisation can line up this sort of investor, but Russian retail and institutional investors simply don't exist in sufficient numbers.

Experts have been dubious from the start over Putin's plan to keep the listings in Russia, despite the progress made in reforming the domestic capital markets. The government now seems to be waking up to that reality.

Moscow started the year with a plan to raise RUB300bn ($10bn) from privatisation, but upped the ante on April 3 when it added another RUB800bn worth of names to the list. However, the size of the challenge became rapidly clear. By April 30, Economic Development Minister Andrei Belousov was saying he expected no more than RUB320bn.

Yet even going back to that original target looked ambitious. By June, the State Property Agency had slashed its forecast to just RUB60bn. Its targets for the coming years were also pared severely. For 2014, the target is now just RUB180bn ($5.5bn), down from RUB350bn, with similar cuts for 2015 and 2016.

The fact that in just three months the plan has gone from selling RUB300bn to RUB1.1 trillion to RUB60bn (and even that is in question) on top of the abandonment of Putin's plan to push all the listings onto the domestic market make the privatisation programme look like it is in total disarray.

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