Putin Opens Asset Sales to Foreigners as Budget Gap Widens

(Bloomberg – bloomberg.com – Ilya Arkhipov and Andrey Biryukov – February 2, 2016)

President Vladimir Putin will allow foreign investors to bid for stakes in some of Russia’s largest companies as the government prepares its most ambitious asset-sale program in years to close a widening budget gap.

“Russia was and remains open for foreign investment and Russia is interested in attracting new foreign partners,” his spokesman, Dmitry Peskov, said Tuesday, a day after Putin said only Russia-based investors would be eligible.

With plunging crude prices and sanctions over Ukraine prolonging the worst recession of the Putin era, Russia is debating offering shares in companies including oil producer Rosneft OJSC, lender VTB Bank PJSC and rail monopoly Russian Railways JSC.

Russia’s budget deficit, already at a five-year high, may swell to 6 percent of gross domestic product this year if the government doesn’t take measures that may have to include a 10 percent cut in spending, Finance Minister Anton Siluanov said last month.

Privatization has been a hot-button issue in Russia since a handful of insiders snapped up some of the country’s choicest assets at rock-bottom prices in the 1990s, turning them into billionaires almost overnight. After Putin came to power in 2000, he promised to destroy oligarchs “as a class.”

“New owners of privatized assets must have Russian jurisdiction,” Putin told the heads Rosneft, VTB, Russian Railways, Aeroflot PJSC, Alrosa PAO and Bashneft PAO on Monday, leading to speculation foreign investors wouldn’t be allowed to participate.

‘Offshore Schemes’

Peskov said that Putin ordered the government to conduct further work on the program and that his comments on jurisdiction were intended for a Russian audience.

“If the question is about a foreign investor, that’s one thing. If it’s about a Russian investor, it must not be another offshore scheme,” Peskov said.
The Finance Ministry has said it wants to raise about 1 trillion rubles ($13 billion) selling stakes in state companies over two years.

The 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 of the ministry’s council on Tuesday.

Oil Addiction

The government is considering broadening the list of major enterprises to be privatized in 2016, according to Ulyukayev’s deputy, Olga Dergunova.

Russia’s economy is less diversified “than it was in Soviet times” and ending its over-reliance on commodities is “most doable when the oil price is $30,” Suma Chakrabarti, president of the European Bank for Reconstruction and Development, said in an interview in Bucharest, Romania. “It’s not going to be doable when the oil price is $80 or $90. It’s most doable now.”

The ruble weakened 2.8 percent to 79.5909 per dollar at 4:34 p.m. in Moscow as oil prices renewed their slide. Brent crude, used to price Russia’s main export blend, was down 4.4 percent at $32.75 per barrel at 1:26 p.m. on the London-based ICE Futures Europe exchange.

‘Knockdown Price’

Russia, which relies on oil and natural gas for almost half of its budget revenue, pumped a post-Soviet record 10.878 million barrels per day in January, adding to a global glut that has pushed prices to a 12-year low.

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 at the Kremlin meeting. Shares shouldn’t be sold “at a knockdown price,” while the state must retain control of strategic and systemically important companies, he said.

Putin last week ruled out selling a stake in Sberbank PJSC, Russia’s biggest lender.

Article ©2016 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2016-02-02/russia-says-state-asset-sales-will-be-open-to-foreign-investors

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