Privatization Process and the State of Property Relations in 2013

In 2013, the content of the privatization process in the Russian economy was determined by completion of the first 3-year forecast privatization plan (program) approved as early as November 2010 which event was preceded by approval of a large-scale package of amendments to the existing 2001 law on privatization.

The most important one is provision of the right to the Government of the Russian Federation to take decisions on privatization of state property beyond the limits of standard procedures determined by the law on privatization and an opportunity to assign the function of the seller of privatized federal property to legal entities.

Within 2013, six deals worth over Rb 286bn with equities of large joint-stock companies were carried out with engagement of investment consultants on the basis of decisions of the Government of the Russian Federation. The above deals included the following: finalizing of the deal on sale of 55% of equities of the charter capital of OAO Vaninsky Morskoi Torgovy Port for Rb 15.5bn; the deal on sale of 5.66% of equities of ОАО NK Rosneft in favor of BP for the total amount of Rb 148.1bn within the frameworks of the deal on acquisition of equities of TНK-BP -- as a result of that deal the funds from privatization of equities of ОАО NK Rosneft were credited to the balance of ОАО Rosneftegaz whose sole founder is the Russian Federation; placement by means of public offering of Rb 102.5bn worth of an additional issue of equities of OAO VTB Bank – as a result of the deal the share of the state in the capital of the bank decreased from 75.5% to 60.93%; a deal on sale of federal packages of equities of OAO TGK-5 (25.1% of the charter capital for Rb 1,080bn) and Airline Sibir (25.5% of the charter capital for Rb 1,133bn), as well as placement of equities of ALROSA, a joint-stock company by means of а public offering to a wide range of investors in accordance with international standards. In the course of the latter deal, 7% of the equities of AK ALROSA which is in federal ownership and 7% of equities owned by the Republic of Sakha (Yakutia), as well as 2% of quasi-treasury equities controlled by the company itself (16% of the equities in total) were offered at the Moscow Exchange. The total amount of the deal was equal to Rb 41.3, including Rb 18bn received for assignment from federal property of 7% of equities.

Assessing in general the deals with equities of large companies in 2013, it can be stated that unlike the previous two years the deals which yielded virtually nothing to the budget dominated in the volume structure (an additional issue of VTB equities and a sale of a package of Rosneft in the course of the TNK-BP deal), while in the 2011-2012 period there was only one such deal in seven (an additional issue of equities of the United Grain Company in 2012).

In 2013, in general, packages of equities of 148 economic entities (interests in the charter capital) were sold – without taking into account two sales of equities which were carried out with engagement of investment consultants (in 2012 – 265 units); 33 federal state unitary enterprises were transformed into open-end joint-stock companies (in 2012 – 103 units).

In 2013, the aggregate volume of the revenues of the federal budget from privatization (sale) and utilization of public property decreased by 1/3 as compared to the previous year, while with taking into account of funds received by the Central Bank of Russia in 2012 from the sale of a package of equities of the Sberbank, by more than a half. However, their absolute value (about Rb 209bn) was the third largest one since the beginning of the 2000s after the maximum achieved in 2012 and the 2011 indices. It is to be noted that in the pattern of aggregate revenues from privatization (sale) and utilization of state property in 2013 the unit weight of the latter source increased from 50% to nearly 3/4.

Also, important development in the sphere of property relations included corporate control market deals related to Rosneft (finalizing of the deal on acquisition of the TNK-BP company, take-over of the Itera gas company and an asset swap agreement with Novatek) and Gasprom (emergence of the information on bringing of the package of equities in the capital of the All-Russian gas monopoly controlled by the government (with interests of Rosimuschestvo, Rosneftegas and Rosgasifikatsii taken into account) to the level exceeding 50% and blocking by the Federal Anti-Monopoly Service of a purchase by Gasprom structures of Kvadra, a generating company), as well as decisions on restructuring of the rocket and space industry along the lines earlier applied in respect of the aircraft industry and shipbuilding industry, that is, through establishment of the United Rocket and Space Corporation.

An important event of 2013 was approval by the Russian government of the new 2014-2016 privatization program.

The principal difference of the above document from the previous one is serious changes in privatization plans of large companies. The list of assets expected to be privatized remains almost the same: it excludes Rosagrolizing, Rosselkhozbank and FSK UES, but adds ROSNANO, Rosspirtprom, Rostelekom, the State Transport Leasing Company and two Moscow airports.

However, unlike the 2011-2013 privatization program as amended in June 2012, reduction of the government's interest in the capital of many large companies suggests preservation of corporate control or, at least, a possibility to influence corporate governance procedures.

As regards ALROSA, a joint-stock company, OAO Airflot – Russian Airlines and Sovremenny Kommerchesky Flot, the extent of reduction of government participation is determined in the amount of 25% plus 1 share; as regards Roshydro, VTB bank, Zarubezhneft and Obiedinennaya Aviastroitelnaya Korporatsia– 50% plus 1 share; as regards Russian Railways, Transneft, Uralvagonzavod, State Transport Leasing Company and the United Shipbuilding Corporation – 75% plus one share. In a number of cases the period of reduction of the government's interest to the above threshold values goes beyond 2016.

Participation of ОАО ROSNEFTEGAS in the charter capital of Rosneft oil company is expected to be reduced to 50% plus one share until 2016. As regards possible reduction of the government's share in the OAO VTB bank below 50% plus 1 share, it is stated in the program that it will be carried out in networking with measures aimed at reduction of the government's participation in the OAO Sberbank of Russia, though the new head of the Central Bank of the Russian Federation said that they had no plans to reduce participation of the Russian Federation in the capital of Sberbank.

In the 2014-2016 period, termination of the government's participation in the capital is declared in respect of seven companies (Rosspirtprom, the United Grain Company, ROSNANO, Rostelekom, the International Airport Sheremetievo and the International Airport Vnukovo) of which in the previous privatization program only the United Grain Company and the International Airport Sheremetievo had such a prospect before 2016.

Termination of the government's participation in the capital of the above-mentioned companies is likely to raise some questions, the more so the forecast of the main revenues from privatization at the expense of equities of large companies which have high investment attractiveness in quantitative terms is lacking in the program. Feasibility of implementation of the program depends to a great extent on the macroeconomic situation (for example, a likelihood of a recession) and the stock-market situation, particularly due to economic and political developments which took place in the 1st quarter of 2014.

Georgy Malginov, PhD (Economics), Head of the Property and Corporate Governance Department