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.

Clan War

Everybody is making much of what has happened with Ulyukaev, and calling it “a decisive turn in the fight against corruption…” former MP and KGB man Gennady Gudkov wrote on Facebook. But this is all just the “wishful thinking” of “naive fools”.

He says that a week ago he had a conversation with a friend who, he implies, is well-connected. According to Gudkov, the friend said,

“”You… cannot even imagine what terrible bickering has started at the very top! Soon there will begin a war between the clans the likes of which we have not seen before!” And he named some very famous surnames in Russia, warring with each other for live and death, including in the government and in the Kremlin.”

He continues:

“All that we see today, is not a fight against corruption (it is inseparable from the “vertical”…) but a fierce… struggle for influence, financial flows, and positions.”

And every method will be used in this clan conflict. From blackmail to corporate raids to physical violence. Gudkov also implies that more assassinations are likely.

Ulyukaev, he says, “was never part of the inner circle of “untouchables””.

“But not everybody has understood that the situation has changed dramatically… the rules have changed…”

Gudkov concludes:

“Describing the tensions in the highest levels [of power], my informed source said: “It will soon come to the point that Putin’s entourage will begin to blame each other for the most deadly sins on live TV… so that the opposition can sit back and relax: the snake will start eating its own tail.””

Anti-Corruption Sideshow

Alexei Ulyukaev appeared in court last night and was placed under house arrest until the middle of January. Prosecutors said he posed a flight risk. At about the same time, it was reported that President Putin had sacked the Minister for “loss of confidence”.

This is reportedly the highest ranking arrest since Beria was ousted.

Most of the opinions in Russian circles are still based on speculation. Most people seem to think that Ulyukaev is not even guilty of the crime he has been accused of, that of taking a $2 million bribe to make a decision that likely wasn’t even his to make.

Political analyst Gleb Kuznetsov told Rosbalt:

“This is a demonstration of the determination of the state in the fight against corruption. It demonstrated that we have no untouchable class. That not only a provincial governor of a region can be detained, but also one of the most influential government ministers. He can be prosecuted in the same way as any other person.”

Rosbalt also talked to the director of the Institute for Contemporary State Development, Dmitry Solonnikov:

“It is a hallmark of our time. The heads of regions, and security officials with the rank up to General, are not simply dismissed, but publicly and openly sent into custody. So in that sense, the detention of Ulyukaev seems logical and is not surprising.”

Solonnikov added that it was clear that Ulyukaev was not the only one who was being monitored. “…the control of policymakers is not a secret.”

His speculation was likely correct as the Russian media reported today that four other high-ranking officials were being monitored. They were named as Deputy Prime Minister Arkady Dvorkovich, Presidential Aide Andrei Belousov, another official at the Ministry of Economic Development, Oksana Tarasenko, and Marina Romanova, who is an aide to First Deputy Prime Minister, Igor Shuvalov.

Others saw this as a continuation of the fight over an ever-shrinking pie of assets.

Political analyst Yevgeny Negrov told Rosbalt that he thought the fight was not over ideology but rather that “the ultimate beneficiary was some kind of “financial-industrial group”.

The President of the “Center for Political Technologies” Igor Bunin thought the conflict was of a more personal nature between Ulyukaev and Rosneft chief Igor Sechin.

But, as I said yesterday, this seems to be mostly about the continuation of the Kremlin’s faux anti-corruption campaign that they have co-opted from Alexei Navalny.

People are fed up with the corruption they see around them. And performing show trials for TV is an effective way to show people that the authorities are doing something, even though nothing will change.

Anti-Corruption Campaign

Russians woke this morning to the news that the Investigative Committee [known as SledKom, in Russian] had detained the Minister of Economic Development, Alexei Ulyukaev.

A statement was released at three o’clock this morning, but it appears to have been taken down at the time I am writing this.

As usual, most of what is happening and what happened are mere conjecture and speculation based on rumors. But according to Bloomberg, the charges relate to Rosneft’s recent purchase of a controlling stake in Bashneft. Allegedly, Ulyukaev took a “$2 million bribe related to his ministry’s approval of the sale of a 50 percent stake in Bashneft…”

“Ulyukaev was caught red-handed while taking a bribe. We are talking about extortion, the dual threats against representatives of Rosneft,” a SledKom representative told Interfax.

Rosneft paid $5 billion for the stake (which was over-priced, as I pointed out at the time).

As usual, there was some hysteria among Western analysts, but Chatham House’s Ilya Zaslavskyi had a more level-headed opinion:

According to Gazeta.ru, Ulyukaev wrote a resignation letter in October, and approval was expected after budget discussions in the Duma. The reason for his resignation was due to his poor forecasts of the macroeconomic situation in Russia.

Meduza reminded its readers:

“His [Ulyukaev’s] ministry was not afraid to give tough forecasts – in particular, the Ministry of Economic Development in October suggested that in the next 20 years the country’s economy expects stagnation, GDP growth would be below average. Ulyukaev said that the country’s economy as a whole needed to adapt to the new foreign policy conditions, including sanctions.”

The first Deputy Chairman of Russia’s Central Bank, Sergei Shvetsov, told reporters:

“I have great respect for Alexei Valentinovich [Ulyukaev]. He is the last person anybody would suspect of anything like that…. What is written in the press seems absurd. Right now nothing is clear.”

Or as the President of Russian Union of Industrialists and Entrepreneurs said:

What I think is happening here, however, is a little more mundane that it first appears. Yes, a Minister has been detained, and accused of corruption. But this goes back to the Sergei Ivanov interview I highlighted a few weeks ago. At the time, Ivanov said that the government would continue its anti-corruption efforts. What he meant, of course, was not that there would be an actual effort to crack down on corruption, but that they would make a show of it for the general population. And I think that is why we are seeing this drama played out in the media.

Asset Stripping Fraud

The article is a translation of a blog post by former deputy chairman of Russia’s Central Bank, Sergei Aleksashenko. In the article Aleskashenko details how the Central Bank is committing asset stripping fraud of Russian banks.

“The scheme is ridiculously simple.

  • The Central Bank turns a blind eye to capital and clients’ deposits being siphoned off from a bank;
  • those same Central Bank passive onlookers then decide that the bank has to be saved (although of 30 bail-outs, not one bank has yet managed to return to full operation);
  • the same people choose which bank will save the bankrupt bank and decide how much money has to be allocated for this noble purpose;
  • then those very same people give the DIA [Deposit Insurance Agency; the equivalent of the US FDIC] a loan for 6-8 years at an interest rate of 0.5% (that’s right – half a percentage point);
  • after that the same people [from the Central Bank], or some of them, visit the DIA where, as members of the Board of Directors, they decide to issue a loan of billions of roubles (at an interest rate of 0.51%) to the banks involved in the bail-out.
  • The bank doing the rescuing then uses the funds it has received to buy a federal loan bond at the current rate of return from the Finance Ministry and receives a guaranteed income;
  • the Finance Ministry meanwhile uses funds from the federal budget for the next 6-8 years to pay the interest on the bond sold to the bail-out banks.
  • At maturity, the bond should pay off all the money received as a loan.”

This scheme, Aleksashenko writes:

“…has already cost over one and a half trillion roubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion roubles.”

Now, he concedes,

“To be fair, it should be said that the banks have paid back slightly more than 20% of the one and half trillion roubles disbursed. To this end, some assets have been transferred on to the DIA balance sheet. But their real value is unknown as the DIA site carries no information about the nature of these assets, why the DIA needs them, what it has done – or intends to do – with them.”

He continues:

“There have never been, nor are there still, any clear or transparent criteria for deciding which bank should be bailed out – and which should be left to collapse – and it is only the bureaucrats who are allowed to have anything to do with analysing proposals for bail-outs…. Moreover, after some time it emerged that the rescuers were finding the allocated funds insufficient, so multiple hasty appeals for top-ups were launched at the Central Bank because “what you sent last week was gobbled up straight away” (a quote from Korney Chukovsky’s children’s story Telephone).”

Aleksashenko concludes:

“….This way the federal budget is incurring ever more debt, although we know that there is no longer any money left in it, so any extra unplanned kopecks spent throws the Finance Minister, who is also a DIA board member, into a blind spin of rage. It looks to me as though this endless stream of new decisions about money to be allocated was one of the main reasons for the recent purge of the Central Bank’s supervisory committee.

When I decided to look at the final summary of what the sacked “supervisors” had been up to, force of habit led me first to the usual place on the DIA site in the hope of downloading the usual tables, but I didn’t find any. So the bureaucrats’ cat had a very good idea of whose meat she had been eating and decided to sweep all the information about her dinner under the carpet – to avoid any uncomfortable questions for the officials.

We must disabuse the said officials: we will find the information, we shall be asking questions, and we shall name and shame those who are personally responsible.”

Sergei Ivanov

Sergei Ivanov granted his first interview after he was transferred out of the Presidential Administration to Komsomolskaya Pravda.

The English language press will likely focus on KP’s question about the rumor that Ivanov “…would lead a new super-ministry of state security…”.

To which Ivanov answered:

“This is one-hundred percent fake! A ministry of state security is not intended… I can say this confidently.”

He also said that such a move would be a mistake from his point of view.

But I want to talk about a couple of Ivanov’s other statements in the interview, mostly because they confirm what I have said in the past about these moves.

Of course, the first question KP asked Ivanov was about his new position, and whether or not it was a demotion.

Ivanov dismissed any rumors that he was in disgrace or was ill.

“I don’t feel any disgrace. And I am generally optimistic about the fact that now I can finally do specific things that I love [emphasis added -ed.] and have actually worked toward for a long time, but, you know, in fits and starts.”

I have brought this up before when speaking about former Russian Railways Chief Vladimir Yakunin. Many people thought that Yakunin had been ousted from his position due to corruption in the company. But it turned out that Yakunin had been freed to work more closely on a project that was very important to both him and the Regime. And I think that this is also what happened with Ivanov, and Ivanov seems to confirm that in this interview.

Ivanov also stated that he had wanted to leave his post in the Presidential Administration earlier, but that Putin had asked him to wait a bit longer. He squashed rumors that there were problems with his health, but said that he was tired of working nearly every weekend, while insisting that he was not tired.

Ivanov described himself as:

“A pragmatic and enlightened patriot. I am doing what I think is useful and necessary for Russia. No matter the scope of this economy, transport, and communications (I, by the way, still remain chairman of Rostelecom’s Board of Directors). I love culture, am engaged in supporting it, and lead the board of trustees of the Kremlin museums.”

He said that his contact with the President “…is not so intense [as it was before], but it still exists.”

On the subject of corruption, Ivanov cited plans to push through revisions to the criminal code. He also confirmed that the government will continue its “fight” against corrupt “officials, security services, the banking sector, and ordinary crooks”.

KP noted that high-profile arrests were increasing.

Ivanov replied:

“This proves that we are sincerely trying to fight corruption, and there are no untouchables.”

He named the banking sector specifically, saying: “It is necessary to tighten banking supervision, in my opinion.”

KP followed that up by asking if the government intended to continue their anti-corruption course, and Ivanov answered affirmatively.

P.S. Compare this with Ivanov’s interview with the FT in June 2015.

Rosneft Debt

More bad news about Rosneft.

The Central Bank’s governor, Elvira Naibullina, told reporters this week that “she saw no risk to the ruble from oil firm Rosneft possibly buying its own shares from state holding company Rosneftegaz.”

But Raiffeisenbank is saying that Rosneft’s expansion plans could cause problems for the ruble.

Rosneft could reduce the sale of foreign currency earnings on the Moscow Stock Exchange in 2017 and cause a “double blow” to the ruble.

Why?

Rosneft is the biggest single seller of dollars on the Moscow Stock Exchange. In 2015, the company sold $45.5 billion and in 2014, it sold more than $90 billion.

But due to its rapid expansion and current debt problems (which I discussed here earlier this week), Rosneft may have to cut back on that activity.

Analysts at Raiffeisenbank calculated that at the end of the first half of the year, Rosneft had about $20 billion in foreign currency on their accounts, another approximately $4 billion that the company should obtain from the sale of shares in Vankorneft and Taas-Yuryakh.

That is it should have $24 billion in readily available foreign currency.

Of that [$24 billion], $5 billion [it was actually $5.3 billion – ed.] was spent on the purchase of Bashneft (the transaction was completed on 12 October), $4.7 billion in scheduled loans are due by the end of the year. Another $11 billion will be used to buy back its own shares from the State.

That is, as mentioned above, Rosneft plans to participate in its own privatization by buying the 19.5 percent stake in itself that the State will put up for sale before the end of the year.

If it does so, Raiffeisenbank says that “…at the end of the year Rosneft will have about $5.7 billion (including rubles), which covers only half of the $11.7 billion debt that needs to be paid in 2017…”

“In the next year, Rosneft could reduce the sale of foreign currency earnings to replenish its foreign exchange assets depleted due to the repurchase of shares (in the case of “self-privatization”), at least until the resale of shares to foreign investors,” warned Raiffeisenbank analyst Denis Poryvai.

In his view, the result is a double blow for the ruble: the company will take a substantial amount of currency from accounts in Russian banks, as a result of which the market will run short of dollar liquidity, and later reduce the sale of foreign currency earnings on the stock exchange.

 

Auctioning Assets

I have discussed the Central Bank’s asset stripping of the banks it is shutting down here before. Rossiskaya Gazeta published an interview today with the Deposit Insurance Agency’s Deputy General Director, Oleg Baranov, about the agency’s plans to hold live auctions to sell the property of bankrupt banks. The assets will be sold to repay defrauded investors, Baranov claimed.

The DIA (Russia’s equivalent to the US’ FDIC)  plans to revive live auctions, with the first one taking place before the end of the year. Ordinary citizens will be allowed to participate in the process. Baranov told RG that they hoped that the competitive atmosphere of a live auction would net them more profit from the assets. He also explained that customers would be allowed to see the items before the auction to see what they were getting.

The DIA is already selling some items online, Baranov acknowledged, furniture, phones, computers, and so on. They are hoping to start selling the same type of items in live auction. If it goes well, they will expand and start auctioning off items of greater value, at least up to half a million rubles.

The newspaper also asked Baranov about the value of the total assets of liquidated banks.

The DIA is overseeing the liquidation of 287 credit institutions, Baranov answered. “The aggregate value of their assets is about three trillion rubles. And it is constantly growing due to the ongoing withdrawal of licences.” He also told the paper that his agency is currently overseeing the elimination of 34 state pension funds.

The Russian government is also looking to recoup its losses by seizing assets of Russian bankers who have fled abroad. The British authorities are still cooperating in this retrieval process, Baranov told RG, “despite some geopolitical differences” they “acted… according to the law, and not guided by emotions.” He cited the case of Sergei Pugachev, whose assets were turned over to the DIA this year by a British court. The International Business Times reported in August that “Pugachev is accused of siphoning $700m (£531m) from his bank, Mezhprombank, including Russian government bailout funds during the financial crisis.” The agency is currently in the process of selling two of Pugachev’s UK properties.

Brain Drain

More bad news for the future of Russia’s economy: Rosbalt reports on the phenomenon of “brain drain” from Russia. That is highly skilled workers needed to drive innovation are fleeing Russia en masse.

What the researchers found is that the lack of competitive salaries and poor working conditions are contributing “to the ongoing “brain drain” from the country.

According to the report titled “Emigration from Russia at the end of the 20th to the beginning of the 21st century”, “the number of Russian citizens living abroad today is much higher than the figure of 1.5 million people officially passing as emigrants.”

“…1.5 million are those who hold Russian passports, came to the Russian consulate, and stood there to be registered.” However, added the director of the Institute of World Economy and International Relations [Evgeny Gontmakher], “a lot more Russian citizens live there without coming to the Russian Consulate and not being registered, that is why they are not present in Russian statistics (of emigrants), they appear to live in Russia.”

The Moscow Times reported:

The real number of Russians emigrating abroad is between three and four times higher than official data, according to a report published by Russia’s Committee of Civil Initiatives.

Official U.S. data for 2014, for example, registered 4.7 times as many Russians immigrating to the country than Russia’s state statistics agency Rosstat, with the same tendency apparent with Germany (5 times higher), Spain (19 times higher) and the Czech Republic (20 times higher).

Gontmakher compared the situation in Russia with that of India, and says that Russia does not compare favorably.

Highly skilled Indians at one time traveled en masse mainly to the US. They created there the foundations for entire sectors, IT, for example. Now, however, there is quite a large return [home] of the Indians, because India has established a number of points of real development. On returning home from the US, an Indian specialist receives a salary that is not inferior to what he received in the US, while he lives in his native, familiar environment. And the flow (of specialists) is now going in the opposite direction. The same situation is taking place in China.

Russia, meanwhile, continues to lose highly skilled professionals as the working conditions in Russian research institutes continues to deteriorate. “Words and appeals to return are one thing, but real conditions are another,” stated the expert.

But it’s not just poor working conditions or bad salaries. There is a real lack of opportunity for people to improve their lives. Innovation is not encouraged. And even if you do invent something patent rights are highly questionable, with little recourse in the courts if someone does steal your intellectual property. Who would stay in such an environment?

State Monopoly

The Moscow Times reports:

The state has rapidly increased its presence in the economy. Together with state-owned companies, its share in GDP rose from 35 percent in 2005 to 70 percent in 2015. The number of state and municipal unitary enterprises has tripled in the last three years alone, and they continue to appear in markets with highly-developed competition where their use of administrative resources and government financing poses a serious threat to other players. Such businesses have mushroomed at the regional and municipal levels, squelching competition in local markets.

The article continues:

The state’s expanded presence in the economy has deepened monopolistic tendencies in the “economic space uncontrolled by the state,” the FAS lamented.

Meanwhile, business people are unhappy with the status quo.

Nearly half — 48% — of respondents in a survey by the Russian Union of Industrialists & Entrepreneurs said that the authorities treat businesses like a “personal piggybank.”

As I have stated numerous times here on the blog, and on Twitter, this is the Russian system. The people complaining know that this is the system they signed up for. They have chosen to operate within it.

The FAS has proposed a plan to help resolve the situation, but it sounds like more state control rather than less:

Artemyev said that to combat monopolies and counterproductive actions by government officials, the FAS recommended focusing on a national plan for developing competition that is being prepared by order of the president. The FAS proposed setting economic indices as performance goals that governors and ministers would have to achieve or lose office.

Former Russian MP Dmitry Gudkov wrote:

What is wrong with the state corporation? First of all, it does not depend on the market. No profit, theft, inefficiency?

Its sole purpose, Gudkov writes, is to take more money from the state budget. The only thing the state corporations are doing is providing jobs for family members of their board members.