President
Vladimir Putin is considering selling
stakes in
some of Russia’s state jewels to foreign buyers to raise cash for an economy
brought to its knees by the collapse in oil prices and sanctions related to
Ukraine. Investors are dubious.
On
the surface, an opportunity to buy into such firms as the country’s largest oil
producer Rosneft OJSC and rail monopoly Russian Railways JSC 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 $90
billion. “The government has been talking about privatization 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 privatization.
Foreigners
Welcome
“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 1 trillion
rubles ($12.5 billion) 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 U.S. 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 PJSC in October 2013.
“U.S.
and European investors will stay away from privatization 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 $100 million in assets, said by phone from Zurich.
Controversial
Issue
The
privatization program 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 privatization 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 privatization 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 corporations who might be interested in these
assets -- companies that have a need for resources.”
VTB Buyback
Past
privatizations 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 decriedthe
plan, which only applied to investors who bought the shares when the company
went public, as Putin maneuvered to gain votes from smaller shareholders.
Buyers
of privatized 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 favorable
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 privatized in 2016.
Sales Skills
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?” 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 privatization auctions. “I am not sure foreign investors will like that.”
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