Privatisation in Russia: a new opportunity

24.11.2009

The sale of state-owned property can today be carried out more cleanly and to greater benefit than in the 1990s

Top government officials have declared their intention to privatise a number of major state-owned and state-invested companies. The aim of replenishing the depleted Treasury can be taken out of parentheses. I would rather focus on my familiar topic of providing incentives and support for big investors.
One of the most painful consequences of the crisis has been the outflow of foreign investments. In late 2008/ early 2009, the volume of capital withdrawn from Russia reached the $165 bln mark. In this context, I see the new privatisation project as a factor for restoring pre-crisis investment spirits.

Considering past experience, organisational, legal and, probably, political provision for the new privatisation project require consideration. As do its scale, transparency and consistency. The facilities to be privatised should appeal to potential investors. The more interesting they are, the greater will be the incentive to return withdrawn funds to the economy. Very important in this connection is whether such companies as Rosneft and Sovkomflot will be included in the privatisation plans and whether VTB will join them.

Yet it will not just be a matter of Blue Chips.  There are about 6000 state unitary and state-invested enterprises operating in Russia that could be reorganised into joint-stock companies and sold off. It is worth noting that this excessive number of unitary enterprises is putting off real demonopolisation of a whole series of economic branches and holding back renewal of fixed assets. I would like to think that transformation of state-owned companies into joint-stock ones will become a trend.  This is where political intent is needed.

Finally, the inefficiency of state companies is nowadays on virtually everyone’s tongues. Privatisation of these assets seems no less promising than all the rest.
Even so, the privatisation auctions must be organised and regulated to preclude any subsequent doubts and objections. This obviously means competent administration rather than new legislation. In particular, the biggest foreign investors must be allowed the greatest possible access. Otherwise, how can a real market price be guaranteed for the shares? Similar auctions in the mid-to-late 1990s came in for many complaints about their lack of transparency and unpredictability and major foreign players were not allowed on to the Russian market at that time. How could sales at “real market prices” be expected?

The current privatisation might prove more successful for another reason. Compared to the mid-1990s, the right of private land ownership has now appeared in Russia and today’s land legislation does not, in my opinion, in any way impede privatisation. Maybe we do need to say a final farewell to the institution of “termless, gratuitous use”, with its legal nature unclear to both investors and the authorities. Investors now choose between leasing and purchasing: the legal consequences of each of these are precisely regulated by law. In many regions, there is an effectively operating institution by which owners of buildings and structures enjoy the exclusive right to privatise or purchase the lease rights to the land plots accommodating their real estate. Moscow is somewhat of an exception. When land plots are purchased in the capital at a price of 20% of their cadastral value (that is, on beneficial terms), the city authorities prohibit construction and reconstruction on them. The final purchase price of a land plot not encumbered by such a ban might reach 100% of its cadastral value, so it proves more profitable to lease it. Maybe the Moscow Government no longer needs new investors …

Privatisation of unitary enterprises and state-owned shares (stakes) should provide new benchmarks for major investors, expand the securities market and improve the competitive environment. From the legal standpoint, I see no serious impediments.

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