Privatization Process and the State of Property Relations in 2011

Last year, privatization processes in the Russian economy highly intensified which situation resulted both in the number of the sold assets and the financial results of the privatization. In the past two years, the post-crisis growth was accompanied by a considerable increase in the budget revenues related one way or another to state property which situation is particularly explicit in comparison with the low starting base of the 2008–2009 crisis.

Generally, in 2011 equity stakes of 359 joint-stock companies (as against 134 in the year 2010) were sold. The above number of the companies also included 38 joint-stock companies (JSC) the sale of which was announced in accordance with the last year's forecast plan (program) of privatization of the federal property (a year before there were only 14 companies), while in respect of 143 federal state unitary enterprises (FSUE) decisions on the terms of the privatization were taken (as against 62 federal state unitary enterprises in 2010).

With growth in the extent of privatization being quite apparent in 2011, it is to be noted that the results as regards the number of the sold equity stakes are comparable with the pre-crisis indices of 2006-2007, while in the mid-2000s over 500 equity stakes were sold on the annual basis. The results are even more modest as regards privatization of unitary enterprises, the more so since converting of nearly 2/3 of such enterprises in joint-stock companies took place within the frameworks of formation of integrated structures.


In 2011, the specifics of the privatization consisted both in initiation of the mechanism of sale of federal equity stakes through private sellers (mainly investment banks) designated by the government and sale of companies which were considered attractive for investment and excluded fr om the list of the strategic entities (sea and river ports, shipping companies and airports) in 2010.


Engagement of ООО Merrill Lynch Securities which was determined as early as autumn 2010 as a sole executing agency of the state order on assignment of common registered shares of ОАО VTB Bank (up to 10% of the authorized capital) permitted to carry out in February 2011 the largest privatization deal in the 2000s on the sale of 10% of the equities of the above bank. The revenues from the sale amounted to Rb 95.68bn.


As regards the sale of transport assets, it was carried out with varying success throughout the year. With a small exception, the state equity stakes of the above group of companies were sold with the sale and initial prices being equal. A number of deals failed to take place due to either a lack of bids or refusal by the buyer to fulfill his payment obligations, while others were cancelled by Rosimuschestvo due to the fact that reports on evaluation of the market value of the equities ceased to be relevant and more updated financial indices were made public. As a result, the most weighty deals (over Rb 1bn) were those related to the sale of the controlling interest in the Tolmachevo Airport (the Novosibirsk Region; over Rb 2.8bn), blocking share holding in the Tuapse Seaport (over Rb 1.61bn) and the Volzhskoe Shipping Company (over Rb 1.04bn).


According to the data of the Ministry of Economic Development of the Russian Federation and Rosimuschesto, in 2011 the total amount of funds received from privatization of the federal property amounted to Rb 121.44bn which figure exceeded by 150% the total amount of the revenues from that source in the past four years (2007-2010).

The above fact justified radical changes in the structure of the aggregate income of the federal budget from privatization (sale) and use of state property in favor of non-renewable sources whose share in 2011 grew by over 150% on the 2010 figure (up to 56.7%) and exceeded a half for the first time in seven years. By its absolute value, the results of 2011 are the maximum ones in the entire period of the 2000s not only as regards the revenues from the privatization (sale) of state property, but also those from utilization of it.

In 2011, among other trends in property relations the following can be singled out:

  • Intense stepping-up of the rule-making process as regards upgrading of management of economic entities with state participation (FSUE and JSC with state participation);
  • Expansion of the practice of engagement of professional directors to governing bodies of joint-stock companies with state participation; both the number of such directors and companies increased by nearly 70% as compared to 2010 and, as a result, the coverage of the sector of joint-stock companies whose equities are in federal ownership with the practice of engagement of professional directors (without taking into account joint-stock companies wh ere the special golden share right is used) amounted to over 26% (for comparison: in 2009 and 2010 it amounted to about 8% and over 15%, respectively);
  • Exclusion of vice-premiers, ministers and heads of other federal executive authorities and persons who are members of the presidential administration from the boards of directors of joint-stock companies with state participation which they were often in charge of (it concerns about 20 large companies) with both a partial replacement of the above persons with independent directors and professional proxies and retaining of mandatory instructions on important issues which are issued to representatives of the state;
  • Ongoing integration of the state-owned assets on a larger scale than in 2010 (in 2011 relevant decisions were passed in respect of equities of 44 joint-stock companies and 92 FSUE, against 46 joint-stock companies and 24 FSUE a year before). The new integrated structures include ОАО Korporatsia Strategicheskie Punkty Upravlenia, Rosgeologia and Tsentralny Moskovsky Ippodrom; it is planned among other things to expand the size of the Federal Hydro-Generating Company, Rosspirtprom and the Sozvezdie Group of Companies and the Morinformsistems-Agat Group of Companies.


It is to be noted that a large number of amendments and additions were introduced into the existing law on privatization; the above amendments were a logical continuation of important innovations which took place in 2010.


Most amendments are aimed at upgrading of the level of competition in sale of assets which are to be privatized and that of transparency, regulation of the privatization process and strengthening of the position of both new owners and privatized enterprises. Other amendments into the legislation (including the profile law on unitary enterprises) are aimed at achievement of multiple options of transformation of economic entities of the given form of incorporation and provide for transformation of such companies not only into open joint-stock companies (as it was before), but also into limited liability companies and autonomous non-profit companies. It remains to be seen to what extent such innovations will be successful.


In such a situation, the new norms which provide both for alienation of the property of 15 categories (in respect of which the law on privatization does not apply) not only by means of other federal laws, but also other statutory acts and a possibility for legal entities engaged in organization of a sale of the property to be privatized without any formalization to effect on behalf of the state some rights of a shareholder or participant in a limited liability company do not appear unambiguous.


G.N. Malginov, PhD, Economics, Head of the Ownership and Corporate Governance Department