Privatization and property relationships in 2014

The past year was marked by launching the Forecast plan (program) of federal property privatization and the guidelines of federal property privatization for 2014-2016 approved by the Russian Government Executive Order of 1 July 2013 No. 1111-р.

It became obvious from the beginning of the year that the privatization program depended critically on the macroeconomic situation (the chance of a recession) and stock market trends governed by the economic and political environment developed in Q1 2014. Naturally, it is the transactions prepared in 2012–2013 that advanced to the forefront. In January 2014, the Russian government decided to sell its stake in OJSC INTER RAO UES and JSC Arkhangelsk Trawl Fleet (ATF), 13.76% and 100%, respectively.
The former transaction (Rb 18,8bn worth) can rather be characterized as quasi-privatization deal, because the buyer was state-controlled OJSC Rosneftegaz embarking on diversification of its business. The company was offered such an opportunity by the previous privatization programs and the effective one, both of which provide(d) that until 2015 Rosneftegaz may act as investor with regard to energy companies whose shares are planned for privatization on conditions that a program on financing of such transactions is available and provides the use of dividends on the companies' shares held by joint-stock company in question.

The latter transaction, whose dealmaker was selected Gazprombank late in 2011, can be exemplified as the first unconventional approach as part of the modern privatization process.
If a transaction amount (Rb 2,2bn worth) outruns the starting price by more than 20%, then its specific feature is a special format of interaction between the new owner (LLC Virma) of JSC Arkhangelsk Trawl Fleet and the regional government authorities, which is based on a shareholder agreement providing for a free transfer of one share in the ATF to the Arkhangelsk Region. The key decisions, including preservations of jobs, incorporation of the company within the jurisdiction of the Region with a view to ensuring that tax revenues are generated to the regional budget, are to be agreed with the regional government which has a seat reserved on the Board of Directors. Apart from social commitments and preservation of jobs, the shareholder agreement stipulates the development of the seaport infrastructure in the Region.

It is tenders that are basically the mechanism of accomplishing such tasks in the course of privatization. However, in the 1990s, the application of this mechanism was attended by numerous abusive practices, most of which included the new owners' default on investment and other commitments. As a consequence, the effective law on privatization of 2001 drastically reduces this instrument to a list of commitments, most of which are of social nature. This is why the entering into the shareholder agreement while selling JSC Arkhangelsk Trawl Fleet can be viewed as new method of ensuring an adequate balance of interests between the state (represented by the Arkhangelsk Region) and the new owner in terms of social commitments and enhancing business effectiveness. However, further monitoring of company's development is needed for a certain period of time in order to be able to exemplify the ATF case as best practice deserved to be followed.
In 2014, the shares (shareholding in the chartered capitals) in a total of 108 business units (148 in 2013) were sold, and decisions on the terms of privatization were made with regard to 33 federal state unitary enterprises (FSUEs) (26 in 2013). Additionally, the process of integration of state-owned assets continued. While taking measures of establishing 16 vertically-integrated companies (VIC), respective decisions were made on the terms of privatization of 11 FSUEs and the shares in 47 joint-stock companies.

Regarding the government involvement in the economy, the milestone event of the past year was the court ruling to reclaim AFC Sistema's majority stake in Bashneft (71.6% of shareholding) to the benefit of the federal government. The ruling was issued on the ground of violations committed in the course of privatization, which arose from the disagreements between the federal government and the constituent territories of the Russian Federation on the division of the entire government properties at the initial stage of the ownership reform and the powers arising under it. The transfer of the shareholding in Bashneft directly to the federal government (represented by the Federal Agency for State Property Management (Rosimuschestvo)) offers the latter a wide spectrum of options regarding the future of the company which remained a regional-level company throughout the entire period of business operations.

The total volume of federal budget revenues from federal property privatization (sale) and utilization increased 35% year-over-year in 2014. The amount of the revenues in absolute terms (Rb 282,3bn) has since earlier in the 2000s become the second after the maximum value reached in 2012.

The ratio of nonrenewable sources to renewable sources in the structure of total revenues from government property privatization (sale) and utilization was almost equal to the values seen during the crisis in 2008–2009, when the privatization process was seriously set back by external conditions and no major transactions took place. Compared with 2013, the share of nonrenewable sources in the structure of total revenues from government property privatization (sale) and utilization in 2014 almost halved to 14.6%, whereas the share of revenues from government property utilization increased almost to 85.4% from 73.6% in 2014.

A landmark event of the past year was the approval by the Russian Government Executive Order of 15 April 2014 No. 327 of a new Federal Property Management State Program (SP) until 2018 instead of the former SP with the same title which had been in effect only about 14 months.

The qualitatively expressed target indicators for the implementation of the State Program Federal Property Management until 2018 are by and large equal to those of the 2013 Program. As a reminder, they refer to such indices as share of federal property units (by category) for whom the target function was set (unitary enterprises, business entities with state participation, agencies, treasury units), rates of reducing the number of property units by principal category (for enterprises and joint-stock companies – as a percent annually, for property units and set-aside treasury land plots – as a percent of the 2012values, except prohibited or controlled items), indices showing the dynamics of technological development of the processes of federal property management, and some others.

The new state program will be implemented under tough conditions of budget constraints, which necessitated the update of the entire federal budget adopted late in 2014.

Georgy Malginov, Ph.D. in Economics, the Head of Ownership and Corporate Governance Department.