Scraping the Bottom of the Barrel

Russian President Vladimir Putin announced yesterday that the government was considering selling stakes in state-owned companies.

The Russian government has been discussing this issue for years, but nothing has ever come of it. However, now that the Russian economy is so bad, it seems the authorities feel they have no choice.

Reuters reported:

Two senior government officials said the plan may only raise between 50 and 80 percent of the trillion rubles envisaged.

In addition, given the parameters set out by the Kremlin:

“The only option is to force some oligarchs, loyal to the Kremlin, to buy stake with a premium to market prices,” said the investment banker, who is close to the process.

“Then it will look more like a tax on a group of people, which would be quite a realistic scenario, given Putin’s style of management.”

This would also be in line what what we saw in the mid-1990s with the loans-for-shares scheme that saw many of Russia’s biggest companies “privatized”.

Amid jokes of a “fire sale”, Duma Deputy Dmitry Gudkov had this to say:

The headlines look lovely. “Putin chaired a meeting on the upcoming “great privatization”. Now let’s consider their essence.

At first glance, the state wants to get rid of the state-owned companies –  “Aeroflot”, “Rosneft”, Russian Railways, VTB [VneshTorgBank], etc. But secondly, they want to keep a controlling stake [in those same companies]. This will not achieve the main task of privatization – increasing efficiency. The money from privatization is a one-off gain, and will be eaten through easily. But if the company begins to operate efficiently and in a new way in private hands, it will increase profits, and it will pay more taxes. That is the real result.

Alas, this is not the result we get from the “great privatization”: like at “Rosneft” sits Sechin, and he will continue to sit, and the new owner cannot sack him because the state has a controlling stake. Who, then, will take the shares? And here is a look at the other conditions of the anticipated transactions.

Buyers should be in Russia’s jurisdiction and not ask for money from state-owned banks for the purchase. In addition, those buyers will be required to have clear vision for the company.

What does this all mean? What shares will be given for cheap state-owned companies by their own managers? This is all that is meant by privatization – a reason for Igor Sechin to get a bit richer. There will be no question of new owners. He [Sechin] buys a little more of “Rosneft” and certainly not at a realistic price, but at a reduced one…

If you think they cannot, just like that in front of everybody, don’t worry: they can. This is exactly the same story that I recently wrote about when “Russian Helicopters” first appointed [former Defence Minister] Serdyukov, and then recall the “virtually unused” in Russia mechanism to repurchase shares of the company by its top management. Well, here is your privatization.

But in fact it [privatization] is necessary – the state as an owner is ineffective. But what we are now sold as “privatization” is in fact scraping the bottom of the barrel.

As you can see, no proper economic measures can be implemented in the absence of institutions. After all, the authorities in Russia have one problem – and it is not development.



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