Bad timing and lack of transparency will further discredit the image of the free market in Russia.
February 8, 2016
By Edward Verona
Russia’s announcement at the beginning of the month that it would sell stakes in major state companies to private owners in an attempt to shore up its budget deficit has sparked a debate on the effectiveness of such a move.
Suffice it to say that the losers of this potential privatization will be the Russian people, who will witness another rollover of state assets on unfavorable terms. While the voucher privatizations of the early 1990s were heavily criticized at the time, they at least had the merit of rapidly reducing the size of the state and creating a market-based economy. Even the reviled “loans for shares” deals of the latter 90s had a similar pragmatic (or Machiavellian) rationale.
Now is the worst possible time for a sale of Russian assets.
However, now is the worst possible time for a sale of Russian state assets, especially shares in oil companies. Not only are oil and natural gas prices at their lowest in more than a decade, but economic sanctions against Russia would keep many foreign investors away. It is highly ironic that Rosneft and Bashneft are among those companies being put on the block. Just three years ago, at a high point in the oil price cycle, Rosneft bought out the private shareholders in TNK-BP, paying top dollar and incurring a massive foreign currency-denominated debt that today probably exceeds the company’s notional market capitalization.
As for Bashneft, it was a privately-owned company until 2014, when the majority shareholder was forced to surrender ownership to the state for reasons that seemed rather contrived. So, who among potential buyers today would feel any more confident about owning a reprivatized stake in that company? Moreover, some potential buyers might hesitate before acquiring shares in Rosneft when there is a $50 billion international arbitral award against Russia for the forced bankruptcy of Yukos, which Rosneft now owns.
As for the winners, they are likely to be insiders who have acquired some beneficial ownership of the enterprises offered for sale. Despite assurances that the sales will be transparent, nothing in recent experience suggests that that is likely to be the case. Other winners will doubtless be those who specialize in cycling the proceeds out of Russia and into “safe havens” abroad.
Finally, another big loser will be the public image in Russia of what constitutes a free market economy. The government is invoking liberalization, privatization and economic reform in justifying the asset sales, but the timing and methods employed will further discredit such worthy reforms that – had they been undertaken in a truly transparent manner when oil prices were in the ascendant – would have yielded huge benefits.
Edward Verona is Senior Director of the Russia, Europe and Eurasia practice at McLarty Associates and the former President of the U.S.-Russia Business Council. The views represented here are the author’s own.