Putin Isn’t About to Let Go of the Crown Jewels After Alrosa

Empty Boardroom

(Bloomberg – bloomberg.com – Anna Andrianova, Andrey Biryukov – July 12, 2016)

Hatched in harsh economic times, Russia’s latest wave of privatization is off to a mixed start, and a sequel is by no means guaranteed.

The sale of a 10.9 percent stake in Alrosa PJSC was the biggest divestment of a state asset since the government reduced its stake in the world’s largest rough-diamond producer almost three years ago. Managed by the nation’s two biggest banks, both of them state-run, shares were priced at a 3.8 percent discount to Alrosa’s closing price on Friday. While plans as recently as five years ago called for the state’s stake to be reduced to zero by 2017, the stock offering still left Russia in control of 33 percent of Alrosa, with regional and municipal governments holding another 33 percent.

The deal, which attracted mostly Russian and European investors, is trying to turn the page on a period under President Vladimir Putin when privatization came in fits and starts. Snarling and often reversing the process were state takeovers that by mid-2015 put the government in control of about 55 percent of the economy and employing 28 percent of the workforce, estimated as the highest share in 20 years. It’s that history that will haunt Russia’s plans to put some of its most prized assets on the block later this year.

“Stakes in strategic companies will be decreased very, very slowly,” said Evgeny Koshelev, an analyst at Societe Generale SA’s Rosbank PJSC unit in Moscow. “The first privatization was a forced necessity, and unlike other assets, it doesn’t fall into a strategic group.”

The government is targeting proceeds of as much as 1 trillion rubles ($16 billion) this year from auctioning off state assets, which would cover almost half of this year’s budget deficit, the widest since 2010. With 52.2 billion rubles raised in the Alrosa offering, First Deputy Prime Minister Igor Shuvalov said on Monday that the program is proceeding on schedule, and stock sales of oil producers Bashneft PJSC and Rosneft PJSC and shipping company Sovcomflot OJSC may soon follow.

“With foreign investors awash with cash and the ruble still trading significantly lower than only a few years ago, demand for Russian assets should be relatively strong,” said Piotr Matys, a strategist at Rabobank in London. “Unless the outlook for the Russian economy deteriorates significantly, it is reasonable to assume that the government may proceed with the privatization process.”

But the urgency is no longer there. Oil prices are up about 70 percent from a 12-year low in February, a boost for the budget that gets about a third of revenue from the energy industry.

The improving sentiment in Russia is playing out in the market, with the ruble gaining more than 15 percent this year against the dollar after a 20 percent loss in 2015. The Micex Index of stocks is trading at 6.6 times estimated earnings, compared with about 5.6 times at the start of the year, data compiled by Bloomberg show.

While the government’s target this year is almost double the 585 billion rubles raised in state-asset sales in 2011-2013, progress in recent years has been fitful at best.

State ownership in Russia was estimated at twice the level in the European Union, a constraint on productivity, according to the World Bank. The Organization of Economic Cooperation and Development in 2013 described government involvement in the economy as “pervasive.”

Yukos, TNK-BP

The state began to expand its reach more than a decade ago with the dismantling of Yukos Oil Co. Rosneft grew into the world’s biggest publicly traded crude producer by output as it acquired assets from Yukos in forced auctions and then bought BP Plc’s venture TNK-BP in 2013.

In 2014, Russia nationalized Bashneft, taking the shares held by Vladimir Evtushenkov’s holding company AFK Sistema amid a money-laundering case against the billionaire. With Bashneft possibly up for sale again, Rosneft is already in contention.

“I doubt that Rosneft and Bashneft sales will happen this year,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “If oil prices will stay close to their current level, there may be no major incentive to sell the key assets.”

Article ©2016 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2016-07-12/putin-down-some-gems-isn-t-about-to-let-go-of-the-crown-jewels

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