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Russia: Privatization Program Faces Many Obstacles
By David Rogovic and Rachel Ziemba
Extensive fiscal stimulus following the sharp economic downturn helped evaporate Russia’s budget surplus. In mid-2010, government officials announced a five-year, US$ 59 billion privatization program covering nearly 900 state-owned firms. While details are still scarce, the government plans to sell stakes in ten major firms by 2013, including the two Russian banking giants VTB and Sberbank, as well as the oil producer Rosneft. Privatization revenues of around one trillion rubles (US$32 billion) would finance roughly 17% of the projected budget deficit between 2011 and 2013, reducing reliance on Russia’s sovereign funds and bond issuance. Furthermore, reducing government ownership of domestic industries could open Russia to more foreign investment, boost modernization efforts and support the diversification of the economy through technology transfer. We expect the offering to attract inflows to Russia, but a number of obstacles make RGE skeptical of Russia’s ability to take full advantage of the privatization.
A relatively small domestic investor base means that the privatization program will largely target foreign investors. The decision to sell minority, rather than majority stakes means corporate governance and decision-making will remain in state hands. Combined with a high degree of corruption, and an inadequate rule of law in the resource sector, foreign investors may continue to be wary of Russian assets. These risks make the timing of, and proceeds from, privatization extremely vulnerable to shifts in global risk appetite. The upcoming election cycle adds another layer of uncertainty. Ahead of parliamentary elections, the state could tighten rather than loosen control over key industries for both strategic and financial reasons. Furthermore, President Dmitry Medvedev is seen as a stronger proponent of privatization and modernization within the ruling Putin-Medvedev tandem. A return by Prime Minister Vladimir Putin to the presidency in 2012 could alter the size and scope of the privatization. (See related Critical Issue on Russia’s Privatization Plan.)