Government looking to bring private investors into the fold

The government is looking to bring the private sector back to the fore after state ownership of the economy has risen as high as 60% during the global financial crisis.

The strategy unveiled this week by Finance Minister Alexei Kudrin envisage raising as much as $29 billion placing key stakes in major state owned companies into private hands.

Amongst the stakes slated for sale to the private sector are a 27.1% stake in Transneft, 9.3% of Sberbank, 24.5% of VTB, 24.16% of Rosneft, 49% of Rosselkhozbank, 9.38% of RusHydro, and 25% of Sovkomflot. Finance Minister Alexei Kudrin says that all the stakes to be sold would be minority holdings.

“We will sell a significant stake in state companies on the market. We plan to keep controlling stakes.”

Despite earlier reports that the list would include sales of shares in Russian Railways and the Agency for Housing Mortgage Lending, the Government has decided to keep them from the list.

Minister for Economic Development and Trade, Elvira Nabiullina would cover a range of companies, and that a key focus would be reducing the government stake in the economy, as well as supporting the budgetary position.

“These will be fairly big companies – possibly banks, partially our companies from the fuel and energy sector. Privatization will be a means not only of attracting money into the budget, which is very important, but it’s also a way of influencing the structure of the economy. Currently the government has an excessive role in some of the sectors, where the government’s share is quite big. We’re interested in encouraging more competition, the private sector.”

Kirill Dmytriev, President, of Icon Private Equity says that the time is right to begin winding back the state stake in the economy and that when they are sold there is likely to be considerable interest.

“Investors will seek an opportunity on developing markets in coming years. Apart from the growing interest from the side of potential Russian investors the state companies shares can spur interest of the global foreign funds and portfolio investors in early 2011-2013.”

Alfa-Bank Senior economist, Natalia Orlova says that the privatization is not focused on plugging the budget deficit so much as increasing the free float of Russian companies and boosting Russia’s perception from the global investment community.

“Referring to a standard economic theory the priority instrument to cover the budget deficit has to be a debt instrument. Only if conditions on debt markets will change and loans schemes are no longer interesting the privatization strategy will help to attract budget inflows.”

Orlova adds that Russia’s debt burden is too low to implement privatization measures aimed at covering a budget deficit.

“The privatization plan fills the bill on stimulating investment activity. As announced in the press the government is planning to offer minority shares on the stock market, mainly for portfolio investors, because these shares will not be as attractive for strategic investors seeks control of a company or needing a guaranty for further purchases.”

Maxim Struchenevsky, Senior economist and macroeconomic analyst at Troika Dialog, supports the major plan of government sales of shares, adding it will have 3 major impacts.

“I see three main targets of the privatization strategy. First two are aimed at solving fiscal issues of the country, covering the budget deficit and expanding the investment market – and with it transparency, and solvency. Another reason for government shares sales is to boost corporate management in companies, improve strategic management and give an opportunity for global operational activity.”

Valry Nesterov, Troika Dialog oil & gas sector analyst says the role of the share sales in plugging domestic deficits may reflect the attractiveness or otherwise of debt financing.

“I have nothing to argue about government strategic privatization plan if it is confident and precisely thought over positive feedback on country’s budget and investment climate. The government can use any measure and, of course, if loans are less attractive than sale of companies shares assuming an increasing investor interest thus we need to follow this strategy.”

Nesterov adds that the free flow of shares can provide companies with additional capital, strong management and a window to a global market.

“Companies whose shares will be later offered on the stock market can gain only positive results from this deal. Transneft may step into the global stock market with an IPO; Rosneft can strengthen its position. Companies can also minimize the role of government on decision making.”

Alfa Bank banking & finance analyst, Pavel Sorokin, agrees with Nesterov on broadening of opportunities for companies with share sales.

“It is a good opportunity to evaluate the real value of the companies and show their solvency and capitalization for potential investors.”

Troika Dialog’s Struchenevsky, says that the timeframe of the proposed share sales – over the coming 3 years – is likely to enable the government to maximize the roceeds from the sales.

“Global interest in Russian companies’ is increasing and the peak of this interest will be during 2011 and 2013. At this time we expect to see the value of the companies’ shares at the maximum.”

Orlova agrees with Struchenevsky that timing of the placements is likely reflect background economic and demand factors which support valuations.

“As soon as the price on oil rises to its forecast maximum Transneft and Rosneft shares will be on sale. The same situation will take place with the shares of the suggested companies.”

Igor Shuvalov, Deputy Prime Minister announced that the sale of 20% Sovkomflot shares will be among first.