Privatization Policy in the Context of the Draft Federal Budget for the Period Until 2015

The draft federal budget for the year 2013 and the 2014-2015 planning period submitted to parliament by the Russian government envisages the use of revenues generated by federal property privatization as a separate source of financing the federal budget deficit.


In this connection, the draft of the corresponding federal law contains no information as to the precise amount of revenues from privatization neither in its main body nor in the annexes. It is only in the explanatory note attached to the document that the monies received as a result of privatization of federal property are specified, alongside government borrowings, as an independent source of financing for covering federal budget deficit.

The continuing privatization of stakes in big Russian companies which are attractive for investors is envisaged on the basis of decisions made by the RF Government when it determined the timelines and methods of privatization with due regard for the current marker situation, as well as the recommendations by leading investment consultants. Dealing with this aspect in more detail, the explanatory note offers information on the impending alienation from federal ownership of shares in a number of joint-stock companies, namely OJSC Bank VTB,  OJSC NK Rosneft, OJSC Rosselkhozbank, OJSC Rosagroleasing, OJSC RusHydro, OJSC FGC UES, OJSC AK Transneft, OJSC Zarubezhneft, OJSC INTER RAO UES, OJSC ‘Rossiiskie zheleznye dorogi’ [Russian Railways], OJSC Ob’edinennaia zernovaia kompania [United Grain Company], OJSC Ob’edinennaia sudostroitel’naia korporatsia [United Shipbuilding Corporation], OJSC AK ALROSA, ОАО Ob’edinennaia aviastroitel’naia korporatsia [United Aircraft Corporation], OJSC Uralvagonzavod, OJSC Rosnano, OJSC Aeroflot, Sheremetyevo International Airport. The implementation of such measures will make it possible to generate federal budget revenue in the amount of Rb 427.7bn in 2013, Rb 330.8bn in 2014, and Rb 595.1bn in 2015.

In this connection it can be noted that, by comparison with the Main Directions of the Budgetary Policy for the Year 2013 and the 2014-2015 Planning Period  published by the RF Ministry of Finance in mid-July 2012, the size of planned privatization-generated revenues in the draft budget has been somewhat adjusted. While their volume over the next financial year is planned to be bigger (an increase of 12.6% against Rb 380bn), in 2014 this figure will decline by 30% (against Rb 475bn). Against such a background, the forecast of the amount of revenues from privatization expected in 2015 has been increased significantly – by more than 1.5 times (against Rb 385bn).

As far as the particular size of privatization-generated federal budget revenue is concerned, it is hard to say whether or not the announced targets are indeed achievable, because the size of this revenue depends both on the list of assets offered for sale and on the value of these assets, and therefore on asset valuation procedures and the situation in the stock market.  

According to the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization in 2011-2013, approved by Order of the RF Government, of 27 November 2010, No 2102-r, privatization revenues to be derived over this period can reach approximately Rb 1 trillion at most. This result is expected to be achieved under the most favorable market conditions, which will arise in the event of the RF Government taking a number of individual decisions to privatize shares in the biggest state-owned companies highly attractive for investors. Should these companies not be privatizes, the resulting privatization revenues in 2012 and 2013 will shrink to a mere Rb 5bn per annum. Since the date of its approval, the Plan has undergone many alterations and amendments, including those brought about by Order of 20 June 2012, No 1035-r, which specifies the process of privatizing shares in the biggest joint-stock companies in the period until 2016. However, the initial estimates of the federal budget’s revenues from the sale of federal properties, contained in the Privatization Program for 2011-2013, have remained unchanged.  

At the same time it should be noted that, over the whole period of economic growth, there was only one occasion – in 2003 – when privatization revenues approached the level of Rb 100bn, although aggregate revenues from the privatization (or sale) and use of state properties (i.e. with taking into account dividends on state-owned blocks of shares, rent payments, etc.) exceeded that threshold on three occasions (in 2003, 2004 and 2007). But even in 2011, when federal budget revenues from the sale of shares rose by 8.5 times on the preceding year, which represented a 40% rise on the previous record high registered in 2003, in absolute terms (Rb 126.2bn) they amounted to no more than 40% of the revenues forecasted for 2013-2015 (in annual terms). According to the Report on the Execution of the Federal Budget As of 1 January 2012 submitted by the Federal Treasury, the planned indicator of revenues from the sale of shares and other stakes in federal properties was implemented by 72.41%. In recent years, revenues from the sale of shares, belonging to the Budget Classification’s category ‘Sources of Budget Deficit Financing’, constituted a major part of the non-renewable property-related revenues of the federal budget, while the role played by the other revenues (from the sale of land and various properties) was relatively insignificant.

In principle, the government can expect to obtain a substantial compensation for its assets put up for privatization, provided that it takes into account the market situation and the recommendations of highly experienced, well-reputed and well-resourced investment consultants. It is equally important for the government to keep intact its exclusive prerogative powers in the field of privatization, and to make full use of the current situation when any real external control over the privatization process is practically non-existent. The currently applied mechanism of the budgetary process, when the text of the law on Russia’s federal budget to be adopted contains no references to privatization in the context of budget revenue, leaves a very wide berth for taking any decisions in respect of the list of assets put up for privatization and to the timelines and format of their sale. Moreover, judging by the explanatory note to this document, part of additional oil and gas revenues could be used, by virtue of the government’s decision, as an alternative source of financing the budget deficit. At the same time, privatization revenues will play a merely subordinate role in financing the federal budget deficit, and the amount of these revenues will be much smaller than that of the funds planned to be attracted through government borrowing  (in 2013-2014 – more than three times smaller; in 2015 – more than two times smaller).

On the other hand, apart from the possible negative effects on the implementation of the privatization program produced by any serious worsening of the macroeconomic situation (for example, the beginning of the second wave of the crisis, or a global recession), there also remain a number of other considerable risks. These risks are related to the insufficient transparency of privatization processes and to the lack of adequate transparency with regard to the plans for and approaches to the privatization of big companies. Yet another risk factor is the government’s reluctance to publicly explain its motives behind certain specifically made decisions, or to provide adequate arguments in favor of such decisions. Bearing in mind that the public response to the privatization of big companies is always passionate and represents a whole spectrum of emotions, the latter circumstance seems to be of particular importance. The rules of the game and the mutual responsibilities of the State and the property buyers must be absolutely clear to civil society. It should be said that a serious drawback of the Draft Federal Budget is its failure to thoroughly address the potential effects of privatization, and lack of consideration for its expediency and feasibility, its alternative costs and possible risks, and its influence on the development of individual markets, sectors, regions, and Russia’s economy as a whole.

G. N. Malginov – Candidate of Economic Sciences, Head of the Ownership and Corporate Governance Department.