New wave of privatizations to help cover future budget shortfalls

Russia is planning a new wave of privatization to help cover an imminent budget shortfall next year. Private investors will have a chance to buy stakes in thousands of companies.

Russia’s biggest oil company Rosneft, the country’s top metal producer Rusal, the second-largest bank VTB and the leading maritime shipping firm SovComFlot. The state controls them all – as well as more than 5 thousand other enterprises. But that could soon change.

Speaking to investors this week, Prime Minister Putin reiterated his commitment to privatizing state-owned companies, allaying concerns that state involvement in the economy is set to deepen, after economic support measures during the downturn and global financial crisis have seen it rise to long term highs.

“Despite the crisis we are not looking back toward large scale nationalization, or increased regulation.”

The scale of the planned privatization would be mind-boggling, considering that, according to the country’s Finance Minister Aleksey Kudrin, the state currently controls 50% of the economy, and that could go higher in the short term.

“Almost half the Russian economy is either state controlled or part of a state company. It means that one of our key goals for the next several years is to reduce the governments share in business.”

With Russia facing an 8% budget deficit next year, and selling stakes in the country’s biggest companies may be the only way to make ends meet. According to Sergey Guriev, Head of the New Economic School just selling the stake purchased on the open market by Vnesheconombank as part of its attempts to bolster the Russian stock market late in 2008 and early 2009 could free up significant cash for the budget bottom line. He adds that going further and selling the myriad of medium sized government enterprises, as proposed by First Deputy Prime Minister, Igor Shuvalov, would cover the budget deficit for considerable time.

“The stakes they are discussing, they are like a stake in Rosneft, a stake in VTB, a stake in SovKomFlot, all the Vnesheconombank portfolio it bought a year ago on the stock market. These things can actually cover up to 5% of GDP, or even more if they also go further, like Mr Shuvalov indicated, in selling hundreds of medium sized government companies. In any case for a year or so this amount may be enough to cover the whole of the budget deficit.”

The question on most investors’ minds is could they expect Russia’s national champion – Gazprom – to be privatized? A cagey Prime Minister Putin gave a guarded reply.

“You sure can expect it. Keep on expecting.”

The message for investors thinking of putting money into Russia was clear: The country’s affirms its commitment to free-market values, even if this commitment is conditional.