Russian privatisation programme in complete disarray
(Business New Europe – bne.eu – July 10, 2013) Russia’s privatisation programme fell into complete disarray on July 9 after the state-owned shipping giant Sovcomflot announced it would float a 25% stake on the New York Stock Exchange later this year.
The decision to launch an IPO on the US exchange comes only a few months after Russian President Vladimir Putin said all of Russia’s privatizations would be held on domestic exchanges in a government meeting on January 29.
State-owned VTB Bank dutiful raised $3.3bn last month with another sale of a 10% stake on the Moscow Exchange, its first secondary public offering (SPO) on a Russia exchange.
The announcement smacks somewhat of desperation as the state partially admitted defeat earlier this month by officially scaling back this year’s revenue target from privatization, but to be honest most of the targets announced since the programme was re-launched by prime minister Dmitry Medvedev at the St Petersburg Economic Forum in 2009 have been little more than pie in the sky.
Sovcomflot’s decision followed an agreement between the company’s management and the IPO organizer, Deutsche Bank. It has already has been approved by First Deputy Prime Minister Igor Shuvalov and the Federal Property Management Agency, a source close to the Sovcomflot’s management told Russian daily Vedomosti.
“Most shipping companies’ stocks are traded in New York [Stock Exchange], where the demand for such securities is the highest,” the source told the paper.
However, in a face saving exercise the source said that the decision is “not final” and that there is a “good chance” that the IPO will at least partially be held on the Moscow Exchange as well.
Currently the 25% stake is valued at RUB10bn ($300m), according to a recent Economic Development Ministry assessment, reports the Moscow Times.
Which way is up?
The about turn is confusing and there are several reasons why Sovkomflot, a company with global reach and one of the better state assets under the privatisation gavel, might have decided to go with NYSE.
The VTB SPO was successful – but only just. As it turned out three sovereign wealth funds – from Qatar, Norway and Azerbaijan – accounted for some two thirds of the money raised. In an interview with bne, VTB’s CFO Herbert Moos explained that selling such a large amount of shares to foreign investors was a bureaucratic minefield and needed several changes to the law for it to happen.
And this was for a company that comes with an in-house investment banking division that can do a lot of SPO paperwork itself; perhaps the obstacles for Sovkomflot were just too daunting.
The second problem is that there are simply not enough potential buyers in the Russian market. The VTB SPO did get away but the shares were not sold to pension funds, or Russians planning for their old age; they were sold in what was essentially a private placement to three very large investors. Not ever Russian company can line up this sort of investor to buy its stock and little investors or pension funds and other domestic institutional investors simply don’t exist in Russia.
Experts have been dubious that Putin’s plan to float all the best companies at home would work, despite the progress made in reforming the domestic capital markets. And the government has been waking up the realities recently.
The government started this year with a plan to raise RUB300bn ($10bn) from privatisation this year but on April 3 upped the ante by adding another RUB800bn to the list of names for a total of RUB1.1 trillion.
But it rapidly became increasingly clear that even getting the VTB SPO out the gate was going to be hard. Russia’s Economic Development Minister at the time Andrei Belousov said on April 30 that it expects to raise only RUB320bn this year from sales that will include a 5% stake in oil major Rosneft.
Even going back to the original target is looking ambitious. By June Russia’s State Property Agency slashed its forecast for privatization revenues for the year to just RUB60bn. The forecast for next year were also cut to RUB180bn ($5.5bn), down from around RUB350bn, with similar cuts in 2015 and 2016.
The fact that in just three months the plan has gone from selling RUB300bn to RUB1.1 trillion to RUB60bn (and even that is in question) on top of the Putin plan to switch to the domestic market, only to accept a reversal of that plan five months later suggest that the whole programme is in total disarray.
The Kremlin has been working with its head in the clouds, but as gravity will out in the end, now the privatization programme is lying on the pavement with a very bloody nose.