Fed up with SOEs, the Russian government proposes taking direct control over their investment programmes

Fed up with SOEs, the Russian government proposes taking direct control over their investment programmes
Fed up with SOEs, the Russian government proposes taking direct control over their investment programmes
By Ben Aris in Berlin January 29, 2019

Fed up with the wastage and on a campaign to improve the efficiency of state spending, the Russian government has proposed forcing all the state-owned enterprises (SOEs) to submit investment programmes for approval, and to tighten the reigns of control over its companies.

The decision was made at a meeting with Prime Minister Dmitry Medvedev on January 24, a federal official and a person familiar with the meeting participants told Vedomosti.

The new direction may include the government taking direct control over the decision on setting dividend payments. The Ministry of Finance has ordered all state-owned companies to pay 50% of earnings as dividends as a way of collecting more revenue for the budget. However, the order has been widely ignored or dodged by some of the biggest SOEs.

“A new proposal to strengthen state control over Gazprom's capital expenditures suggests that a significant faction of interests are looking to exploit the company's frequent failures to improve revenues and effectively guarantee Novatek's dominance for future export growth, barring an expansion of pipeline capacity to China. This is significant given that Gazprom just failed to secure financing from the China Development Bank (CDB) for the construction of the Amur Gas Processing Plant, instead resorting to two-year bridge loans. China likely wanted to avoid angering the Trump administration, but it has, in effect, tightened the screws on Gazprom,” Nick Trickett of BMB wrote in a note.

Though Gazprom can finance the project itself, its bloated capex for inefficiently designed projects kills its dividends, and by extension draws the ire of the finance ministry and others looking to use state control to improve returns to the state budget.

“So while Germany may be helping out Nord Stream 2, it does so from a very strong negotiating position. In short, these geopolitical plays for influence many have touted for years are still blowing up in Alexei Miller's face. Any meaningful shift in oversight over spending aimed at improving dividend returns for the state's shares should influence future spending plans if adopted,” adds Trickett.

Russia's finance ministry warned that it would have a RUB204bn ($3.3bn) hole in budget revenues in it if SOEs don’t pay out the 50% of profits they have been ordered to by the government, Interfax and Vedomosti daily said on April 23 citing unnamed sources in the government.

The 2018 federal budget planned to raise RUB380bn in dividends based on 50% of IFRS net profit, which most of the state majors dodge. Gazprom natural gas giant alone will save paying the state RUB78bn by paying 25% of consolidated net profit.

Rosneftegaz holding, controlled by influential ally of President Vladimir Putin Igor Sechin, is another long-time rival of the Ministry of Finance in the fight for dividends, and still holds half of the RUB40.6bn interim dividends for January-June 2017 from Russia's largest oil company Rosneft. Rosneftegaz does nothing other than hold shares and has less than a dozen employees. Sechin is head of both the oil company and the holding.

Also Russian oil pipeline monopoly Transneft dodged the full dividend payout for 2017. It is unlikely that given the favourable oil prices environment the government will manage to create the urgency and will to have the oil and gas giants budge.

The government already has the right to set some of the parameters at some SOEs. For instance the government sets the tariffs for pumping oil and gas at Trasneft, the state’s own pipeline monopolist, as well as Russian Railways (RZD) tariffs.

The proposal is not a new idea, and was first floated in October 2018 by Energy Minister Alexander Novak. Now the Ministry of Economic Development is developing the methodology, one of the Vedomosti interlocutors says.

There are some in government who oppose the initiative. Deputy Prime Minister Dmitry Kozak wants to limit dividends to finance SOE investment programmes, two officials said. According to them, at the Medvedev meeting, Kozak proposed not paying any dividends on profits that infrastructure companies receive from state-regulated activities, so that they can use this money to finance investment programmes.

In 2019, the government expects to receive almost RUB590bn from SOEs as dividends, another RUB626bn in 2020, and by 2021 the amount should increase to RUB675bn.

Based on previous budgetary cycles, there is a risk that the state will receive 70% less as dividends, the chairman of the Accounts Chamber Alexey Kudrin warned in October.

At the end of 2017, 50% of net profit under IFRS was paid by all large state-owned companies, except for Gazprom, which gave up only 26% of its profit under IFRS, or about RUB190bn, despite being the largest of the SOEs. The company attributed its failure to its large investment programme into pipelines including Power of Siberia, Turkish Stream and Nord Stream 2 pipelines. Having failed to receive additional dividends from Gazprom, the state made up for the loss by hiking the mineral extraction tax (MET) instead.

In what maybe the first results of the government's threat to take direct control of these decisions, the head of Gazprom’s finance and economics department, Alexander Ivannikov, told Interfax on January 29 that the company’s current budget assumes a dividend of RUB10.43 per share for 2018, which is 30% higher than the payout for 2017.

Gazprom's investment programme remains a problem as it reached a record RUB1.5 trillion in 2018. Even after the completion of the current major construction projects the company still plans to invest no less than RUB1 trillion a year, according to deputy chairman of the board of Gazprom Andrei Kruglov. The upcoming programme includes RUB1.326 trillion in 2019, before falling to RUB1.065 trillion and 1.251 trillion respectively in 2020 and 2021.

Russian Railways' investment programme for 2018 was RUB550bn, utilities holding Rossetii invested RUB240bn, and Transneft spent RUB342bn.