According to press reports last week, the Medvedev government will this week try to firm up various aspects of planned privatizations in the period to 2017. At this stage, the privatization plan is basically the same as was approved by then president Medvedev in August last year – with the exception of companies in the “fuel and energy” sector.

(For more background, see my 18 July 2011 article entitled “Medvedev should ease up on ‘privatization’!” and my 31 July 2011 article entitled “Privatization – ‘what to’ and ‘how to’!” by clicking on “Expert Group 15: Managing government property and privatization” in the right-hand column.)

It appears that the great majority of state assets in the “fuel and energy” sector (with the exception of Gasprom) are going to be consolidated under the control of 100% owned Rosneftgas, whose chairman of the board is likely to be Igor Sechin.

Rosneftgas already owns about 77% of Rosneft, whose CEO is also Sechin, and about 11% of Gasprom. Rosneftgas will now also take equity positions in a number of other large “fuel and energy” sector companies which are fully or partly owned by the state.

According to Elvira Nabiullina, assistant to President Putin (and former Minister of Economic Developmemt), the idea is that Rosneftgas will be an “investor at the stage of pre-sale development”. That is, Rosneftgas will inject capital into these companies and prepare them for privatization when market conditions are better and/or when the companies themselves are in a better financial condition.

These companies will issue additional shares (so boosting their own capital) to Rosneftgas which will finance their purchase with its present cash holdings and dividend flow (from its shares in Rosneft and Gasprom). As well, it has the capacity to borrow significant funds in the market (if necessary, using its shareholdings as collateral).

The Ministry of Economic Development has, according to an “Vedomosti” article last week, suggested that by 2017 the state exit from shareholdings in the following way:

completely (with the exception of a “golden share” which will permit state representatives on the board of directors to veto certain types of transactions) from Rosneft, RusHydro (hydro-electricity producer in which state shareholding is about 60%), Zarubezhneft (state controlled, and engaged in the oil sector outside of Russia), and subsidiaries of MRSK-Holding (the Inter-regional Electricity Distribution Grid of which the state owns about 54%);
completely (with no-golden share) from Inter-RAO (which mainly has various energy producing assets);
and sell the state holding in Transneft (oil pipeline monopoly) down to 75% (is presently about 78%).

A sale of a small packet of FGC (Federal Electricity Grid in which the shareholding is about 79%) shares is foreseen in the privatization program for the next year or so, and there will supposedly be an eventual sale of 25% of Russian Railways (presently owned 100% by the state).

There are also ports. The state’s 20% share in Novorossiysk Sea Port, the country’s biggest sea port, is planned for this year — although Sechin has reportedly being trying to get it included under the Rosneft or Rosneftgas umbrella. Also reportedly slated for sale are 55% of Vanino port and about 25% of Murmansk port.

According to the “Vedomosti” article, Vanino is one of “the largest” ports in Russia and four companies have received Federal Anti-monopoly Service (FAS) approval to bid.

The state share in Rosnano will be reduced to 90%, and the state will also eventually sell additional or all shares in Sberbank,VTB, Aeroflot, Sheremetyevo, Sovcomflot, Alrosa and Rostelecom.

There are thus a lot – and it is a very mixed bag – of assets to be sold. However, there does not seem to be much of an overall strategy – perhaps other than reducing the state share in the economy (which is clearly desirable) and exchanging equity assets for cash (which, in itself, is less clearly desirable in economic terms).

Or, maybe there is a sort of “strategy”!

On 16 April “Vedomosti” reported on a Ministry of Economic Development report concerning the supposed debate about Russia being an “energy superpower” or a “knowledge economy”. (See my post of 1 May 2012 entitled “Small steps sometimes better than ‘strategic’ decisions” by clicking on “Expert Group 1: New model of economic growth. Securing macro-economic and social stability” in the right-hand column.)

“There is no decision yet”, said the Deputy Economic Development Minister Andrei Klepach at the time, and added that “another round of discussions will be held and after that the government will come to a decision either way”.

One scenario had Russia relying heavily on oil and gas, but with substantial modernization and development of new fields, energy intensive industries, and associated infrastructure – ie it essentially attempting to take greater advantage of Russia’s resource base. The other possible scenario gave at least equal importance to supporting the development of the “high-tech” sector, with policy and budgetary resources re-orientated toward the development of “human capital” (ie education, science, health), “information”, non-resource transport infrastructure etc.

I suspect that a decision has now been made — explicitly or implicitly — to pursue both “strategic” paths at the same time!

Medvedev and members of his cabinet – including Dvorkovich – will get to do the “knowledge economy” bit, while Putin and Sechin will play with the “energy superpower” assets.

Even if this is the case, the extent of the planned consolidation of assets under Rosneftgas – to promote an “energy superpower” – does not make a lot of sense.

While there may be some economic justification for consolidating oil producing assets under the control of Rosneftgas, I fail to see the logical connection with the production of hydro-electricity.

And there is little economic justification for giving Rosneftgas control over natural monopoly type transport infrastructure. Even if a reasonable case could be made for Transneft being under the control of Rosneft (which I doubt) there is absolutely no economic (or technical) case for the electricity distribution networks of FGC and MRSK-Holding to be brought under the Rosneftgas umbrella. The same applies to Nnovorossiysk Sea Port.

Electricity distribution networks, pipelines and ports are almost impossible to duplicate (although there are rare exceptions) and the owners of these assets should never be actual or potential customers (ie users) of these facilities. The potential for the owners of the facilities to favor one customer (ie themselves) over others, and so reduce fair competition, is too great.

Presumably, this is what the FAS vetting of potential owners of Vanino Port is all about. However, the potential for abuse will remain.  Many countries that have privatized natural monopoly type assets run “access regimes” which seek to ensure that all potential users can get access to the natural monopoly type facilities under equal conditions, but these are invariably clumsy even with an effective legal system.

My own view is that natural monopoly type assets should remain under state ownership or be highly regulated. The benefits of economic competition can still be substantially realized by ensuring that non-core assets (and subsidiaries) are disposed off and that non-core services (anything from maintenance and repair services, transport, payroll management etc) are purchased in competitive markets.

So, for these reasons, I cannot see the sense in selling 25% of Russian Railways (which will always be subject to regulated tariffs), although if someone is stupid enough to buy such shares there is a case for the government to take their money – and then just ignore them! The best option is, once again, the disposal of non-core assets (including rolling-stock).