At this time Igor Sechin seems to be facing defeat in his attempts to increase the influence of Rosneftegas (and himself) in the privatization of government owned assets in Russia’s fuel and energy sector. Prime Minister Medvedev (and his economic ministers) are demanding that Rosneftegas hand over most of its accumulated cash to the official budget in order to help pay for President Putin’s pre-election expenditure promises.

This has further stimulated Sechin to seek to develop a relationship between Rosneft and BP.

Are these developments good or bad for “Russian economic reform”?

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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”!

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As noted in the previous blog on this site, the final “Strategy2020” Report has six parts with the first being entitled a “new model of economic growth”. Also as noted, this part is divided into three sections with the second entitled “strategy for improving the business climate and increasing investment attractiveness with the aim of moving to more stable growth”.

Although this section makes some important points, it is not wildly exciting reading and I was tempted to pass-over it and try to go onto something else. However, I then noticed an article on the “Russia Profile” internet site about SMEs soon being able to more easily purchase the premises which they presently rent from various levels of government. See: http://russiaprofile.org/business/56557.html

These are extracts from the article:

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Expert Group 15 has prepared a very good interim report on “Managing government property and privatization” which will be included in a interim consolidated report by all the Groups to be discussed by the Government in August. 

The Group 15 interim report only appeared on the “2020Strategy.ru” internet site on 26 July, but parts of it were reported in “Vedomosti” on 25 July. On 26 July “Vedemosti” reported that First Deputy Premier Igor Shuvalov had already sent a report to President Medvedev with suggestions for widening the privatization program in the period to 2017. Medvedev has been pressuring the government (headed by Putin) to quicken the privatization process (and had set a deadline of 1 August for new proposals).

It could be that the advisory work of Group 15 has struggled to keep up with the government decision making process and that the early appearance of its interim report in the media was an effort to compensate for this. However, the 27 page report of this Group is generally in sync with what has been reported about the Shuvalov report (which is, in any case, probably much shorter), and with its considerable detail can be seen as a “how-to-do” as well as “what-to-do” document.

Shuvalov’s report seems to contain few surprises.

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President Medvedev has expressed his indignation about the hidden ownership structure of Domodedova Airport which handled 2.3 million passengers in 2010, and which is supposedly valued at around $5 bn. Even after the January terrorist attack which killed 37 people, the “management” of the airport have refused to divulge the ultimate owners.

What should the Russian authorities do about this?

Aside from doing nothing, one option is to resume state ownership (ie nationalization). But, there are probably some more appropriate steps between these two extremes that could be taken.

Some issues to consider are:

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President Medvedev is trying to give further privatization a hurry-up, but perhaps he should ease up a little.  

In 1992, after my second visit to Russia as Chief Economist of HSBC (Australia) I wrote about the reform plans then contemplated: “The pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. … The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy.” (See left hand-side of page for full article.)

The institutional framework is obviously now much better, but possible impediments to competition enhancing transactions which give the state a decent price remain. Moreover, some of the suggested sales in the “natural monopoly” area are possibly counter-productive.

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