COMMENT: The state as stock market investor in CEE

By bne IntelliNews August 20, 2015

Peter Szopo of Erste Asset Management -


The presence of a broad, liquid stock market in an economy is, at least in theory, the exact counterpart to a situation where the corporate sector is dominated by state-owned enterprises. In real life, however, state-controlled companies can be found on many stock exchanges. Typically, major privatisation efforts through stock market listings result in previously fully state-controlled companies turning into listed but still state-controlled companies. But often governments are timid in selling off state assets. Very rarely privatisation programmes have been driven – like Lady Thatcher’s was – by the deliberate intention to reduce the influence of the state and to support private ownership. More often privatisation has been the result of government attempts to (re-)fill empty state coffers and/or of state-owned companies’ needs to raise new equity. In those cases, governments tend to sell only small stakes, sometimes because of resistance from management or – more often – from unions.

In Central and Eastern Europe, privatisation was simply the consequence of the total collapse of the socialist system, which had left the corporate sector without sources of new capital and in many cases without proper governance. Still, many companies – those thought to be of strategic importance – were only sold reluctantly. However, while all CEE countries had similar starting points, the state’s presence as shareholder of listed companies differs across the region.

Romania, Poland with highest share of state control

The country that has gone furthest in leaving listed companies on their own is the Czech Republic. Among the listed companies, the Czech state only has a stake in CEZ, the country’s main electricity utility. At the other end of the spectrum are Romania and Poland, which still hold stakes in 60% and more than 40% of the main listed market segments. While the former is less surprising given that it took time before Romania really embraced market reforms, the high share in Poland will be unexpected for many who remember Poland as a poster child of reform already in the early 1990s. Equally surprising is the fact that Russia has the second lowest share of listed companies still controlled by the state. 

The picture changes slightly when the number of state-controlled companies is replaced by government stakes in listed companies as the key metric. While Romania remains the place with the highest degree of government involvement and the Czech Republic the one with the lowest share, Russia moves to second place with 25% of the market’s total capitalisation owned by the state. This is roughly the same level as in Poland. 

One of the main conclusions from those figures is that the state’s presence as a shareholder does not say a lot about the performance of the respective stock market. A case in point is Romania, which had the best performing market by far in CEE in recent years – despite the high share of government-controlled companies. However, this should not lead to the conclusion that without a continuation of privatisation the Romanian stock exchange will have an equally bright future.

Russia keeps grip on oil and gas, but lets go elsewhere

Another conclusion is that the view of Russia as a mostly state-controlled economy is simply wrong. True, the current government and its entourage has clearly shown statist instincts in many instances. Improving the environment for private business has not been the primary goal of economic policy. However, the state’s direct involvement in businesses outside oil and gas, banking, and utilities has been limited. Particularly the oil and gas sector is a prime example of the government’s efforts to (re-)establish state control. The Yukos affair, the acquisition of TNK in 2013 and the recent renationalisation of Bashneft all served this purpose. That said, important sectors of the economy like metals and mining, fertilizers, retail, telecoms and internet companies are run or dominated by private sector companies. The state’s role as owner is even exaggerated by the figures presented above because a number of Russian private companies are listed in London or New York and therefore not included in calculations based on domestic stock indices.

The data on state ownership show that across the region electric utilities obviously are the sector where governments find it the most difficult to let go. Almost everywhere – including the otherwise quite pragmatic Czech Republic – utilities remain firmly under state control. From an economic point of view there are few reasons why utilities need to be run by the public sector. Governments’ grip on this sector is not confined to the ex-Socialist universe; also in countries like France, Sweden or Austria the belief that the state is the best producer of energy is still firmly entrenched.

A final observation: Poland seems to be going in the wrong direction as far as the government’s involvement on the stock market is concerned. As a recent piece of research from Deutsche Bank (“State-owned market, August 6, 2015) documented, the share of government-controlled companies among companies in the WIG-index, the market’s main index, has more than doubled since 2002. Of course, this is the consequence of the government’s privatisation policy, for which it should be applauded. However, the Polish state shows little inclination to really transfer control of the oil and gas sector and the utility sector to private owners. The recently reported pressure on listed energy companies to contribute to the rescue of the country’s coal industry and recurring demands for a “Repolonization” of the country’s financial sector are not going unnoticed among private investors on the Warsaw Stock Exchange. 

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