Russia To privatise or not to privatise

IN THE 1990s privatisation in Russia was meant to be a way to wipe clean the vestiges of the Soviet economy and to create a new class of property owners. It had some success but, by creating a class of very rich oligarchs, it both weakened the state and planted seeds of resentment among ordinary Russians. Yet when he was inaugurated as president again last May, Vladimir Putin signed a decree calling for the sale of all state holdings in firms outside the defence and energy industries by 2016.

The aims may be different from the 1990s: to import foreign know-how, to attract investors and to improve corporate governance, as well as filling state coffers. But a political angle matters too. It goes back to the presidency of Dmitry Medvedev (now Mr Putin’s prime minister), who three years ago announced plans to sell off up to $100 billion of state assets. Talking up privatisation, says Alexander Kliment of Eurasia Group, a consultancy, was part of the “game of using Medvedev as a foil for the more statist Putin.” Now that the Medvedev interregnum is over, the mood has shifted back to a state-capitalist model.

October’s huge $55 billion deal under which the state-owned oil giant Rosneft is buying 100% of TNK-BP does not explicitly affect plans for privatisation. Some officials even tried to portray it as part of them, since BP will end up with a 20% stake in Rosneft. The economy minister, Andrei Belousov, has denied any rethinking of privatisation. But by moving core assets back under state ownership, the signal from Rosneft of a shifting wind is clear. The deal also showed the resurgent power of Igor Sechin, a Putin adviser who is Rosneft’s chairman and a proponent of a strong state role in the economy.Mr Putin also believes in the virtue of state control, especially over strategic industries. And he remains uneasy about renewed economic crisis. As Mr Putin sees it, according to one oligarch, maintaining as much control over the economy as possible “gives you the feeling of security in turbulent times”. This means that, despite the May decree, the privatisation agenda has slipped. Mr Putin speaks with more urgency about improving Russia’s ranking in the World Bank’s ease-of-doing-business surveys from 112th now to 20th place by 2018. Moreover, a budget deficit below 1% of GDP and a debt-to-GDP ratio of under 10% means there is little need for asset sales.

Privatisation thus risks becoming an orphan policy. Some of that is explained by Mr Medvedev’s shrinking role. Politically, says one economist who advises the government, Mr Medvedev “doesn’t exist any more”, so there is “no champion for privatisation”. It is becoming clear that the “cabinet does not have a real preference” when it comes to privatisation, says Natalia Orlova of Alfa Bank. That leaves individual company bosses with some latitude.

If a firm’s managers see advantages in selling shares—as did German Gref of Sberbank, which sold a 7.6% stake for $5.2 billion in September—those sales will go ahead. But where they are reluctant or sceptical, they can find plenty of reasons to delay or not to sell at all (Russian Railways is perhaps one example). As a manager in a state-owned financial institution puts it, “most of the work will have to be done by us”. Next up is likely to be the bank VTB, which will sell a 10-25% stake some time this year. Sovkomflot, a shipping group, and Alrosa, a diamond giant, may also sell minority stakes.

The result will be a “parallel process” says Alexander Radygin of the Gaidar Institute, a think-tank, in which privatisation for banks, say, will look different from that for energy. Under Mr Sechin, the holding company Rosneftegaz may even buy other state-owned energy firms to consolidate resources and amass value.

The real question is not what is privatised, but how. The state may consider the exchange of energy holdings between Rosneft and Gazprom to be privatisation; or it could count sales to state companies like Russian Technologies. Assets can be sold in less than transparent processes, such as the purchase by Russia’s Summa Group of 50% of United Grain Company last year. That does nothing to boost its attractions for foreign investors.

Privatisation may be a “signalling mechanism” to investors, as Roland Nash of Verno Capital, says, but it alone cannot solve the other factors that stand in their way. For that, the government has to do the harder work of improving property rights, the courts and the regulatory system. Privatisation, concludes Mr Radygin, should be seen as an “instrument, not a goal in and of itself”