On the surface, an opportunity to buy into such firms as the country’s largest oil producer Rosneft and rail monopoly Russian Railways would seem almost too good to be true. Potential buyers see many obstacles that could prevent any deals from happening, not the least of which include Russia’s track record in mismanaged sales and the uncertain role of the state in new ownership structures.
“I will believe it when I see it,” said Pavel Laberko, a London-based money manager at Union Bancaire Privee, a wealth manager that oversees about $90bn. “The government has been talking about privatisation for several years, but they always find an excuse not to do it. I see a high probability of this not happening.”
A deepening recession, a ballooning budget deficit and Brent crude at around $30 a barrel have weakened the oil-reliant economy and forced Putin, who has tightened his grip on the state, to mull privatisation. Shares of Rosneft slipped 0.2% to 271.40 roubles in Moscow, while VTB Group, the nation’s second biggest lender, advanced 1.1% to 7.148 kopeks.
“Russia was and remains open for foreign investment and Russia is interested in attracting new foreign partners,” the president’s spokesman Dmitry Peskov said on Tuesday. The Finance Ministry has said it wants to raise about 1tn roubles ($12.5bn) selling stakes in state companies over two years.
The country has struggled to ramp up an ambitious asset-sale plan after relations between Russia and former Cold War adversaries soured when Putin annexed Crimea in 2014, triggering a series of punitive bans on US and European business transactions with major companies including Rosneft. There hasn’t been a major divestment of a state asset since the government reduced its stake in Alrosa in October 2013.
“US and European investors will stay away from privatisation sales even if the stock prices are really attractive since they’re afraid of possible new sanctions,” Sergey Vakhrameev, a money manager at GL Financial, which oversees about $100mn in assets, said by phone from Zurich.
The privatisation programme is a contentious topic given that Russia’s most prized assets wound up in the hands of oligarchs in the 1990s at bargain prices following the collapse of the Soviet Union, turning them into billionaires almost overnight. After Putin came to power in 2000, he promised to destroy oligarchs “as a class.”
Any interest in privatisation assets would likely come from countries such as China and possibly from some Russian oligarchs, according to George Hoguet of State Street Global Advisors.
“The first round of Russian privatisation resulted in the missallocation of resources and concentration of wealth in the hands of the oligarchs, so a lot depends on how they do it this time around,” Hoguet, a Boston-based global investment strategist at State Street, said by phone. “You might find buyers from China’s state-controlled Corps who might be interested in these assets - companies that have a need for resources.”
Past privatisations have left international investors with mixed experiences. VTB Group’s 2012 share buyback at their initial public offering price from investors who lost money after participating in the 2007 share sale triggered criticism by foreign fund managers. Funds including Charlemagne Capital Ltd and Van Eck Associates decried the plan, which only applied to investors who bought the shares when the company went public, as Putin manoeuvered to gain votes from smaller shareholders. Buyers of privatised assets won’t be able to finance deals with loans from state-run banks and any sales “must take account of market conditions,” Putin said this week at a meeting at the Kremlin. Shares shouldn’t be sold “at a knockdown price,” while the state must retain control of strategic and systemically important companies, he said.
The Russian state budget’s in a “critical” situation and, given the global turbulence in financial markets, there’s no use waiting for more favourable conditions, Economy Minister Alexei Ulyukayev said at a meeting on Tuesday. The ministry said the government is considering broadening the list of major enterprises to be privatised in 2016.
International asset managers will likely need a convincing roadshow from the Russian government.
“We are talking about companies that are very important to Russia’s economy and security, some of these companies are strategically important for Russia, so does this mean that the Kremlin will have input in how these companies are run?” said Paul Christopher, chief international investment strategist at Wells Fargo Advisors, who in the 1990s worked in the former Soviet Union republics attracting western investors to privatisation auctions. “I am not sure foreign investors will like that.”
