State Fire Sale

Vedomosti reports today that the Federal Property Management Agency is debating new ways to dispose of its assets in order to get the best deal.

According to the law on privatization, the state’s shares in companies must first be put up for auction. And if that process doesn’t work, then they move to a public auction where there is a minimum set price, and anyone can bid above that. This year, 90% of the auctions did not take place, and they moved to public auction. Meaning that the State did not get the market value or even as much as they had anticipated for the stakes they sold. For example, the sale of a stake in the state diamond corporation, Alrosa.

As a result, the Federal Property Management Agency is discussing options to rectify this.

One option, Vedomosti reports, would be an auction without naming a minimum price. But this is complicated by the fact that you would need some minimum set of people or companies bidding, otherwise you could potentially have issues with collusion, as happened with the loans-for-shares auctions in the 1990s. Yukos, for example, bid against itself by creating shell companies that appeared to have no connection with Khodorkovsky’s bank. Thus guaranteeing that they would be the only ones bidding on the assets, and keeping the price low.

But this option is slow and cumbersome because what happens is that you have to keep going to auction if you don’t have enough companies to meet the requirements.

So officials recognize that it is necessary to simplify and speed up the process. One idea that is being considered is “declaratory privatization – when the asset is sold at the request of the investor”.

How would this work? “…any organization, without waiting for ads [by the Agency], can apply for privatization; an investor can pay for an audit and evaluation [of the company].” The Agency would then have to “…notify the public about the application, [and] wait, for example, three months…” If there are no opposing applications, the asset would go to the initiator.

“Experts have suggested this method for a wide range of assets.” But the Agency wants to tread carefully because they think this is really only appropriate for smaller assets, and not larger ones.

“According to the Federal Property Management Agency, in the first half of 2016, the State was a shareholder or had the right to participate in the management of 1627 joint-stock companies.”

But “state-owned companies are active in the acquisition market” (see, for example Rosneft’s purchase of the Bashneft shares and its plans to purchase a stake in itself next month).

640 JSCs are under the control of the State, and of those, 83% are up for sale, according to the Agency.

“Since the 2000s, the government has contributed to the charter capital of some state-owned companies [e.g. Rosnano, Rostec, etc.], but the law forbids the 100% ownership of the company… therefore the State wasn’t given 100%, but 100% minus one share. And these are the shares now hanging in the balance. Another 19% of companies are in the process of bankruptcy.”

Meanwhile, the Agency is attempting to improve its marketing strategy, in order to widen the pool of buyers. They have begun “posting information on websites, and in news agencies, buying advertising in the mass media and billboards, and print booklets.

It is unclear what President Putin actually thinks about all of this, Vedomosti concludes.

“On the one hand, large-scale privatization has shown that it is very difficult for the authorities to part with state property…” an official told Vedomosti. They would prefer to keep going round and round until they get the best price. At the same time, Putin said this week that there are other considerations besides money.

In other words, the Regime is anxious to get these assets off their hands, and collect what cash they can, rather than wait to get the best price. This is even more necessary now as the 2017-2019 draft budget anticipates draining both of the Finance Ministry’s reserve funds.

One thought on “State Fire Sale

  1. Pingback: Ulyukaev Affair – Nina Jobe

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