Taking state controlled companies to the private sector

With the Russian government looking to sell down its stake with a multi year privatization programme, Business RT spoke with Igor Bulantsev, CEO at NORDEA Russia about the implications it carries for investors, the state, and the companies.

RT:  How much interest is Russia’s privatization programme going to attract from international investors?

IB:  “I think there should be tremendous interest for Russian privatization programme from all over the world.From different types of investors – private equity investors, strategic investors, portfolio investors – from all types of investors.The question is, which we probably understand now, is timing.Currently timing is not very good, due to not Russian specific problems but the global situation as a whole.”

RT:  Do you think the government should push ahead with the programme quickly or wait until markets calm?

IB:  “My personal opinion is that of course any kind of large scale privatization should happen when and if it is of high value to potential investors.It doesn’t make any sense for the state to sell state owned companies at a low price, which is currently in the market.So I think the state doesn’t have the urgency, need, for privatization.If you have a look at the budget and macroeconomic scenarios for next year. We see that due to higher oil price, due to many other reasons, the budget is better balanced compared to previous scenarios.So there is really no urgency in that, we see that the state really understands that and that, and it doesn’t look like he state will do any urgent cheap sales.”

RT:  So you think it will most likely be delayed?

IB:  “Yes, I think so”

RT:  How is it susceptible to global volatility?

IB:  “Again it depends very much on the timing.Although we understand that global liquidity is still at a very high level.But due to many reasons, due to slower global economic development, due to particular banking problems – I mean Basel III regulation and expectations of banks due to Basel III, and as action plans which are now under implementation in many global financial institutions – that really creates volatility, or creates low interest from investors.”

RT:  What are the key drivers of the programme?Is it changing the government ownership levels in the economy, budget deficit, or changing the management of the companies?

IB:  “I think there are two key drivers.Of course on of them is to balance the budget, to have income in the budget.But another reason that for me is more important probably, and of course the state do confirm that it is a very important reason, is that privatization should be a real driver for economic development.Because we understand that the state is not that efficient an owner, and state owned companies are not developing so efficiently as private companies.So in this regard we need both private Russian investors, and foreign investors, to run companies much more efficiently.To drive the economy out of that.We really need this impetus, we really need those drivers forward factors.”

RT:  There is a massive range of companies likely to be part of the programme including some big ticket stakes in Sberbank, Rosneft, Alrosa etc.Beyond the big ticket items what is the attractiveness of the privatizations?

IB:  “Well of course, if you take the biggest companies, of course they are the biggest interest, because such companies as Sberbank, Rosneft, are really unique companies.They are amongst the largest companies not only in Russia but also in the world, with the largest, if you take Sberbank, customer base, very profitable banking platform, and very nice prospects for the future, with nice growth trends.If you take Rosneft, one of the largest oil companies, taking into account the oil price, taking into account future prospects for oil price development, certainly Rosneft is one of the most interesting stakes in the privatization programme.”

“Beyond that we come from a situation where Russia is a strategically very interesting market in many industries – electricity, retail, telecoms, energy etc.There are of course very big interesting companies, in all of the industries, which would be for sale in the privatization programme.But also there are many companies of a smaller size which should be interesting.There are probably different types of investors which are coming to buy stakes in Rosneft for example, there are many portfolio investors and strategic investors, like we have seen during programmes to develop Arctic shelf.So different investors are interested in different companies and different stakes, but there are lots of investors interested in Russia because of high population, because of large natural resources, because of future position of Russia in the world economy, global economy, and European economy.And, on the other hand, Asian ties – the position of Russia as in between Asia and Europe and a kind of bridge between them.”

RT:  What will be the key factors determining the success of the programme?For the government?For international investors? For the companies themselves?

IB:  “Of course, one of the key factors, which all of the investors will take into account, that’s the political situation, political stability, and we expect Presidential election and Duma election, although nobody expects any surprises from that, but still of course it is one thing to make decisions before elections and another to be comfortable after all of the elections are done, and we see a stable situation for the next years.On the other hand a lot will depend on how the situation will be changing in terms of corruption, in terms of transparency, in terms of enforcement, in terms of decision and many other things like this.So infrastructure, institutions and development of institutions will be very important for everybody.And we see that the government does understand that and we have seen lots of moves, like those initiatives on changing the board of directors structure, and bringing more independent directors.That is probably not the perfect structure at the moment. Because we understand that the government will still influence in a great way, the Board of directors.But that is still a right move and I think that is well accepted by all of the foreign investors.”

RT:  How will the political landscape influence the privatization programme? How big a factor will it be?

IB:  “That is a big factor.We should remember that, we talk about privatization and we talk about investors, we talk about internal investors we talk about foreign investors.And I think that for both foreign and domestic investors the outcome of elections – Duma and Presidential elections – are important. We understand, we talk to different customers, again domestic and foreign, and everybody looks at this situation.They look for certainty.Taking into account that there are no surprises expected, still certainty is better, and many investors are just waiting.They don’t want to make any decision now, they are just waiting until there is certainty and then it could be positively taken, depending on the privatization programme, or any other events.”

RT:  What are the main risks for investors?

IB:  “The biggest problem, or the biggest challenge, I would say, that’s for Russia and for investors looking to that, is what is going to happen to the Russian economy.How the Russian economy will be developed in terms of dependency on oil, and gas and other natural resources.Will all those initiatives from the government be successful – modernization, innovation, etc.Because everybody understands that we have a risk in Russia – that the Russian economy will be more and more dependent on oil, and other industries will show poor development. So for all of the investors that is very important, that the structure of the Russian economy is would be more quality, and less dependent on gas and natural resources.So that trend is really important.”

RT:  The government has indicated it will be looking to keep a golden share in some companies – how important for international investors to be clear about what circumstances will apply to the golden share?

IB:  “It always has two sides. On one hand investors understand that if the government wants to have a golden share in one company, that means that this is one of the strategically important companies for the state and it will somehow be in the loop of the government – a positive meaning I mean.Because the government will probably support or probably will be able to discuss the future of the company, somehow.So the key word is here – possible support from the government.The other side of the coin is that, of course, investors don’t like any kind of uncertainty.Because Russian government was sometimes seen by foreign investors as unpredictable, in some areas.So this kind of uncertainty, poor predictability of government moves was really scaring sometimes.So, two sides, and that depends really on the company, and how transparent the government communicates how this veto right or how this golden share will be used.”

RT:  It has been said by Sergei Guriev that a game changer would be selling controlling stakes in the companies, that the government will lose control of the commanding heights of the economy, and the reforms irreversible.Do you think we are already moving in this direction?

IB: “We are moving there, we have a long way to go.There have been lots of communications regarding privatization programme and everybody enjoys what President Medvedev was telling at the economic forum at St Petersburg, and on many other occasions. So we are moving in this direction, but we are too far from the ideal situation. We really have to make concrete steps. Again we understand, as we discussed, there is no urgency in selling nice assets at a low price which is currently in the market, on the one hand. On the other hand the government should remember that if and when there will be more privatization, we will have more quality owners in those companies, and a larger impetus for development of the whole economy.”