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Saturday, March 17, 2018

“Holes in the budget will be covered by pieces of the Motherland”

The Russian authorities announced the beginning of “big privatization”. On sale will be exhibited state-owned stakes in the largest domestic companies. The declared aim — at the expense of the proceeds to patch a hole in the budget. However, judging by the fact that it wants to sell the state to cover the budget deficit through privatization will still fail. And the conditions of its implementation are such that the most likely buyers — close to the authorities, the oligarchs and the state. That is, in fact, we are likely to once again see the redistribution of state property in favor of “their”.

Photo: pixabay.com.

Favorite rake

Financial crises were commonplace. The gaps between them do not exceed 10 years, and each time the scenario repeats itself: the fall in oil prices, a sharp budget deficit, devaluation of the ruble. In August 1998 the course “wooden” drop per day in 4 times. In 2008, it fell by another 50% to 36 rubles per dollar. Nobody thought it was the bottom. However, in the beginning of 2014 for green demanded a little more than 33 rubles. Now the dollar is worth almost 80 rubles. Blame it on the oil, the price of which is falling and being pulled along by our economy.

The 2016 budget risks falling into a pit. It is designed for the price of a barrel to $50 and even at that price closes with a deficit of 2.4 trillion rubles. Now a barrel of oil costs $34 with a small and at such prices by the end of the year we can cover the budget deficit 5 trillion — this is 5% of GDP.

In principle, the budget deficit can be closed through borrowing — the benefit amount of public debt in Russia is small. However, in terms of sanctions it is not so easy: access to cheap money on Western capital markets for Russia are limited, and therefore, will have to take a very high percentage. Moreover, the downturn in the economy continues, which makes borrowing more risky (and therefore more expensive): if the economy falls, and falling taxes, and lenders become less confident in the reliability of the state as a borrower.

The situation in this regard is something slightly reminiscent of the 2008 crisis — were also in recession, and the external capital markets were closed. But there are also major differences. First, foreign markets were closed not because of sanctions, but because of the global financial crisis. And it was clear that as soon as the acute phase passes, they will open again. Now everything, including the Russian authorities seem to have believed that the sanctions are for a long time: the Central Bank, for example, writes about it in his forecast scenarios. Secondly, in the 2008 crisis, fiscal problems and economic problems were largely solved at the expense of means of Reserve Fund: crisis, roughly speaking, just “flooded with money”.

Now this is not possible, money in the Fund remained little — enough “fat” 2011-2013 authorities have opted not to save money for a rainy day, and to increase social obligations and other government spending. If now to solve the problem of budget for the contingency Fund, it will be enough, by expert estimations, for a year and a half. And chances are that by that time will cancel the sanctions or will start strong economic growth, almost none.

To reduce the budget, of course, possible. But the failure, for example, social obligations or a reduction in defense spending (which also entails the growth of social tension) — the measure is extremely risky from a political point of view: in this year’s Duma elections, in 2018 presidential elections.

Therefore, the Russian authorities decided to throw in the “last resort” and announced largest sale of the property. Terms of a new “big privatization” announced personally by President Vladimir Putin.

The die is cast

That the government can take a decision to privatize part of state-owned Rosneft (and it is the largest piece of government property from the planned privatization) to replenish the revenue side of the budget, Vladimir Putin said at a press conference in December last year.

Strictly speaking, Prime Minister Dmitry Medvedev in November 2014 has signed the order required for the privatization of 19.5% of Rosneft shares belonging to the state holding Rosneftegaz. The reduction in the share of Rosneftegaz in the equity of Rosneft from 69.5% to 50% + 1 share was provided for in the approved 2013 program of privatization. This Directive of the government was allowed to sell the package, but its timing is not fixed.

In addition, until now the government has stated that it is not going to force a sale of government property due to adverse market conditions — due to the economic crisis, Russian stocks are now quite cheap.

But at the end of 2015 Putin actually hurried to the Cabinet of Ministers with the decision. “Of course, the question always arises, is now the market conditions to sell these securities, generating results for the economy share of the property, for example, in “Rosneft”. You never know the situation, or not the same”, — he said at a press conference. He added: “I do Not exclude that in order not to scorch the reserve, and to provide income and to change the structure of these large companies, the government and go to those decisions.”

In fact, the start of the privatization of the company was given by the President at the meeting on privatization in early February of this year. At the same time clarified and conditions, which will conduct the sale of state property.

“A controlling stake in strategic companies with state participation have, at least today, save in the hands of the state”, — Putin said. Experts immediately noted that this setting already imposes some limitations on the possibility of selling state property under the 2013 plan. So, in “Aeroflot” the state-owned stake is now close to control in the Russian Federation in the company’s 51.17% of the capital, a presidential decree authorizing the erosion of this share to 50% + 1 share. Further sale of shares by the Central Bank in Sberbank will reduce its stake below controlling. In the “United grain company” the state 50% + 1 share (the rest of the group “Amount”), the UGC is listed in the privatization plan for 2014-2016.

Vladimir Putin also said about the number of other restrictions that the state must provide in the course of privatization transactions. In particular, to pay greater attention to the quality of investors. “The transfer of shares in private hands is possible only if the buyer of the development strategy of the acquired company. The new owners of privatized assets should be in Russian jurisdiction,” the President said, once again noting the need for “de-offshorization” of the Russian economy.

Another condition is that the buyers of state assets must either have its own resources necessary for the development of companies or debt, but without raising Finance from state banks. And that privatization need to take into account market conditions and not to sell the shares at bargain prices, as this will benefit the budget and fraught with hostile takeovers of rival companies. “The implementation of state property must be economically justified, feasible, you need to consider market conditions and market trends. Of course… we all know that some things contradict each other, but we need to find middle ground”, — said Vladimir Putin.

At a meeting on privatization to the President had invited heads of “Rosneft”, “Bashneft” “Aeroflot”, “Sovkomflot”, Russian Railways, ALROSA and VTB Bank. It is logical to assume that the sale of shares in these companies the government considers as the main source of “privatization” for replenishment of the budget. However, the President’s press Secretary Dmitry Peskov said that the final list of the privatized companies at the meeting were not formed — Putin instructed the government to finalize the list after you have marked the criteria for the sale of state assets.

But on 19 February the Minister of economic development Alexei Ulyukayev, in General, confirmed this assumption, saying to journalists that, according to government plans, it is about the privatization of five major state companies: “Rosneft”, “Bashneft”, ALROSA, Sovkomflot, VTB. The income from the privatization of large companies in 2016 are expected to be about 800 billion rubles.

Earlier, Ulyukayev said the need to consider the question of reducing the government stake in the largest banks. “We need to return to the issue of privatization of our largest banks — Sberbank and VTB, he said in January. — It’s very high quality assets that are attractive throughout the world. Partial privatization and partial occupancy in favour of capital these companies will fundamentally change the situation from the point of view of capitalization of the Russian banking sector and will allow him to digest the massive resources that can be localized through the implementation of a new model of savings of the population”.

The share of the Central Bank in Sberbank and the Russian property Fund in VTB have not changed for several years, although occasionally the discussion about further privatization results in the public space. Now the Central Bank controlling stake in Sberbank; its head German Gref said that he considers it possible to reduce this package to the blocking. According to the news, the government is not considering the sale of a stake in Sberbank. In VTB the state represented by the Federal property management Agency owns a 60.9% of the ordinary shares; pursuant to the 2013 plan of privatization, this percentage can be reduced to a controlling (50% + 1 share).

Total recall

What are the parameters of the Russian budget for the current year is still completely unclear: the Ministry of Finance promises to prepare and submit proposals for updates until the end of the first quarter. The budget for 2016 was shaped based on the price of oil at $50 a barrel. Assessment income is 13 trillion 251 billion rubles, expenses — 15,417 trillion. The deficit will amount to 3% of GDP, or 2,165 trillion.

But now the oil price is just above $30 per barrel. Alexei Ulyukayev has said that he believes the most likely average annual oil price at $40. In this case, in his opinion, the budget deficit may reach 4.6 to 4.7% of GDP, about 1 percentage point of the deficit will be covered by privatization.

Thus, it is clear that by itself, the privatization problems of the budget deficit in any case does not solve. Although, of course, and reduces the amount of current budgetary problems of the government.

Another thing is that privatization is not only a method of extraction of momentary benefit; theoretically, it provides the long — term effects- the appearance of the companies of owners, improve corporate governance, business development and, as a consequence — the creation of new jobs, increased tax revenues to the budget.

And in this sense, the proposed privatization scheme raises many questions. In the first place on limitations imposed on participants in privatization deals.

First, note that the requirement on the existence of the Russian jurisdiction, although understandable (de-offshorization, the sanctions regime, and indeed you never know what those suckers want to do with our national treasure), but still requires some justification. Obviously, this is, to put it mildly, reduces interest in Russian assets — both from foreign investors and from Russian. It’s no secret that the main reason for the execution of transactions with the assets of Russian companies through offshore companies is not a desire to evade taxes, and basic mistrust of the Russian legal system, its ability to protect property rights. And this situation is not quickly remedied. Therefore, the requirement of Russian jurisdiction obviously will reduce investors ‘ interest in privatization, which means that the state will earn less than they could. Moreover, given that controlling blocks of shares of privatized large companies will remain in the state, this requirement sounds, if not illogical, then at least requiring justification.

Another requirement for potential investors — a good reputation. A purely qualitative note, the condition is entirely at the discretion of the officials. And, finally, the requirement to invest in development companies, and without the help of banks. Given that the banks last year mainly received public assistance under the programme of recapitalisation, as well as a pretty hard situation of the Russian banking system as a whole, just a question on filling: what other banks besides the state, now has “long” money on large-scale investment projects?

So, we obtain the following. The most likely contenders for the purchase of assets in the forthcoming privatisation of the Russian oligarchs. And not all, and those who transferred money from offshore to Russian jurisdiction. Among the latter, for obvious reasons, to prevail will either be close to power, or at least absolutely loyal to her business. If only because it is close to the authorities have been penalized and that from them it was logical in the first place to expect the return of funds to Russia, away from the “dangerous tour”.

Thus, if not in form then in essence, we are likely to get privatization on the model of the famous “shares auctions of the mid-1990s” (see “Help”). Then the state also had big problems with the budget. And the choicest pieces of state property also went with available funds close to the power of the oligarchs. Then some of the privatized companies are still operating successfully, some were sold, some actually renationalisation. That in itself is neither good nor bad. Confused by one thing: the enthusiasm for the pledge of privatization and economic benefits from it why-that did not hear — neither the current administration nor the opposition, nor even by those who organized this process in the mid-1990s.

photo: Mikhail Kovalev
Igor Sechin will soon have not only to wait for the reception of the President, but also to spend more time to communicate with new private shareholders of the company.


Pavel Sigal, the first Vice-President “SUPPORT of RUSSIA”:

“History repeats itself. In the 90’s were famous for mortgaging auctions, which resulted in the huge enterprises, a legacy of the USSR, were given to the entrepreneurs is very cheap. Now privatization will lead to such a a new redistribution of property and the accumulation of capital: state-owned companies, which stood up in the period of high oil prices, have built a management and honed the product or service will be sold very cheap.

But you cannot say that without privatization one can do. The budget now will face a strong deficit, and the state needs to fulfill social obligations, to prevent the discontent of the broad masses of the population.

To postpone the privatization and to wait until prices for securities of Russian companies will grow, there is no possibility: the economy, the budget may not survive until this moment. Asian investors will not be interested in buying Russian assets: too many risks, they do not know. Buyers of Russian assets will become a major corporations close to the state apparatus”.

Alexander Razuvaev, Director of analytical Department of Alpari:

“Cause accelerated privatization — the budget deficit. Of course, to sell the most liquid securities that are liquid and have a market rate, much easier than the assets, are poorly known. Even large commodity and transportation companies.

But for privatization will be offered a minority stake of companies. The increase in the number of shares in free circulation will increase the weight of these companies in the stock indices and will raise their quotes. To keep the capitalization when the economic situation on the financial market becomes stable, these companies will be able to redeem these shares. But until the crisis, and money is not free, so such deals will be few. However, it is unclear what shares, when and at what starting price will be on display, so to give an accurate forecast figures very difficult.”

Timur Nigmatullin, an analyst CC “FINAM”:

“Overall I’m quite positive about the prospect of the upcoming privatization of state-owned stakes in major Russian companies. This step will allow “to kill” two birds with one stone. First sale will replenish emaciated because of cheap oil and gas Federal budget. Thus, it reduces the risks of monetary financing of the budget deficit in Russia since the 90-ies or Ukraine/Venezuela 2015. For the population this means a sustained trend of lowering interest rates on loans and inflation slowdown, despite the election year. Secondly, the government will significantly increase the attractiveness of the Russian market for domestic and foreign investors, including pension funds, through growth in the number of shares in free float.

As concerns sale of assets at an unprofitable price, we note that from an economic point of view privatization is somehow always favorable to the state (if it is not about “strategic” assets), even if asset sales occur at lower prices. The fact that the state can get revenue from these not only through dividends but also through taxes. But it does not have to divert valuable resources to manage these same assets.”


As the oligarchs have privatized Russia in the late XX century

It is considered that privatization in Russia began in 1992, after the introduction of privatization vouchers, so-called vouchers. However, it is not so.

In March 1990, after the adoption by the Supreme Soviet of the USSR law “On property in the USSR” began in the country “nomenklatura” privatization, which media have dubbed “creeping”. On the basis of article 16 of the law the officials of the management bodies of the relevant business, renamed business Association (the Association), became owners of “its contribution” to the common property of the mythical collective subject. This simple method of privatization of state property was practiced throughout the country, but most of all in Russia, whose territory had the largest amount of Federal and Republic bodies of the industry.

And on 1 July 1991 the Supreme Soviet of the USSR after almost six months of consideration adopted a law “On the basis of denationalization and privatization in the USSR”. The Russian Parliament on 3 July adopted the laws “On privatization of state and municipal enterprises in RSFSR” and “On registered privatization accounts and deposits” and “regulations on the Russian Federal property Fund”. Federal and Republican laws do not contradict each other and allowed for both paid and unpaid character of privatization. However, they had significant difference. If the Federal developers have focused on a reimbursable privatization (the so-called model sales), Russia declared primarily the donation of property to all its citizens. To do this, all citizens were to be discovered registered privatization accounts, which were supposed to transfer annually a fixed sum. Use it only for acquisition of shares of privatised enterprises.

In the future, after the collapse of the Soviet Union, the privatization went to the Russian scenario. However, accounts were not registered, and the transfer of funds to them was held only once — in the form of a voucher. But these bearer securities immediately turned into a commodity, so it is possible to ascertain the presence of privatization and the “Union” shit — in fact it was fought for money. It is clear that this mixture of a hedgehog and a snake gave the result: citizens still consider themselves deprived and the state is still unclear what worked.

The decree of the President of Russia “About introduction in action of system of privatisation checks in the Russian Federation, which gave a start to the process of the voucher privatization, was signed on 14 August 1992, but was released in final version on August 21. According to this document, on October 1 began issuing privatization checks (vouchers) to the population of Russia. The decree set the nominal value of checks — 10 thousand rubles the government Officials loved to mention the car “Volga”, which every Russian will be able to get in exchange for the voucher. But most have not received anything — part of the vouchers were bought by speculators at low prices, the part is completely disappeared in voucher funds. Interestingly, the author of the idea of vouchers Vitaly naishul (it was called as Anatoly Chubais) said that in the early 1990s was opposed to their use. This idea, emphasized economist, was developed in the early 1980s, it suggested the presence of a powerful state authority capable of providing a distribution of property by the adopted scheme. Ten years later that state was not, and ensure the normal flow of the process of voucher privatization was no one.

The start of the second major stage of privatization can be considered as March 1995, when the ONEKSIMBank President Vladimir Potanin on behalf of the Bank consortium offered the government a deal: the largest national banks are willing to lend to the government in exchange for the right to manage state shareholdings. Bankers said that the government badly needs funds to Finance the Federal budget deficit, are at the disposal of large packages of shares of privatized enterprises, which it intends to sell. However, the release to market of securities on such amount, by some estimates, could backfire in the form of a catastrophic drop in stock prices and collapse of the stock market. Therefore, bankers have proposed to transfer their shares as collateral in exchange for loans to the government. When more prosperous times and in the budget there will be money, said bankers, the state will return the loans, and then be able in a relaxed atmosphere to engage in the privatization of state property.

The bankers offer was accepted. But the auctions took place is very strange — to the extent that they de facto did their own candidates for purchase. And when it is time to repay loans, the state money is not found, and the largest Russian enterprises became the property of creditors. As a result of mortgaging auctions in Russia was formed the politico-economic regime called oligarchic capitalism.


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