Five months ago president Dmitry Medvedev announced that the government would be redoubling its privatisation programme, relinquishing controlling stakes in giants including Rosneft and Russian Railways, and completing the sales on an accelerated timetable.
But doubts are growing about whether Medvedev’s vision – one of the few hallmarks of his presidency – will actually come to fruition.
The programme was slated to kick into this gear this autumn with a secondary public offering of Sberbank, Russia’s largest bank and a favourite among investors thanks to its strong corporate governance and good balance sheet.
But following a 25 per cent drop in the RTS index since Medvedev’s announcement, the Sberbank offering has been temporarily delayed until market conditions improve. Others could be a waiting longer. And by longer, we mean much longer.
According to a letter sent by deputy prime minister Igor Sechin to prime minister Vladimir Putin and seen by Vedomosti, the FT’s sister paper, the state is thinking about delaying the secondary public offerings until after the group’s stock start trading at their initial share prices again.
VTB’s London-listed global depositary receipts are currently priced at $4.15 versus a 2007 initial share price of $10.56; the GDRs of Novorossiysk Sea Port (20 per cent owned by the state-run Federal State Property Management Agency) are now trading at under $8 versus an initial share price of $19.20 in 2007; while Sberbank’s American depositary receipts are trading at $9.94 in London versus $14.60 when they were admitted on to the London Stock Exchange this July.
For Rosneft the situation is a bit less clear: while the oil group’s London GDRs have appreciated 6 per cent in rouble terms since Rosneft’s 2006 listing, they have fallen 8 per cent in dollar terms, Vedomosti writes.
While it makes sense that the Kremlin would prefer not to sell shares in its most attractive bluechips at firesale prices, Sechin’s letter is a little troubling. For one, it hints that the government will be unlikely to leave any money on the table for investors – a perennial problem for investors in Russian public offerings – and price the companies at the highest valuation possible.
Moreover, it means that the government’s 2011 – 2013 timetable is looking more and more like a fantasy, a serious blow to Medvedev who stated at the St Petersburg Economic Forum in June that previous iterations of the privatisation programme had been “too modest”, and that the high number of state controlled companies led to “low entrepreneurial and investment activity”
“Such an economic model poses a danger for the country’s future. This is not my choice,” Medvedev emphasised at the time. “My choice is different. Private entrepreneurship and private investment should dominate the Russian economy.”
Medvedev’s political fate has changed dramatically since he made that statement – it’s unclear whether the fate of the privatisation programme has as well.
Arkady Dvorkovich, Medvedev’s chief economic aide, has scrambled to play down the significance of Sechin’s proposal, telling Vedomosti that the privatisation schedule would not be based solely on the companies’ market capitalisation, and portraying Sechin as a bureaucrat unwilling to embrace change.
“I think the proposal comes out of a desire to keep administrative control over the companies,” he said.
The comments appear to signal the start of a new tug-of-war over the privatisation programme between Putin and Medvedev’s allies – a fight that is likely to only get more convoluted after the two leaders switch roles in May.
Regardless of who wins, the privatisation plan will eventually go ahead: the government needs the proceeds from the estimated $32bn in asset sales. But the delays and changes will do nothing to win over investors, who have long been sceptical about the programme.
As Steven Dashevsky, fund manager at Dashevsky & Partners, told beyondbrics recently:
“The government says they have all these fantastic privatisation plans. Who are they going to sell [the companies] to – the investor that leaves at the first signs of a crisis?” he said, referring to the sharp fall in Russian equities earlier this fall.
Investors will grow more and more sceptical about these “fantastic privatisation plans” the more the government continues to change them – and delay them.
Related reading:
Igor Sechin drags privatisation of Rosneft, VTB, Sberbank, Vedomosti
Russian privatisations: turbulence ahead, beyondbrics
Medvedev seeks to roll back state, FT
Stefan Wagstyl
Josh Noble
Rob Minto
Pan Kwan Yuk
Jonathan Wheatley
Heba Saleh