Russia Considers Continued Privatization

Publication: Eurasia Daily Monitor Volume: 8 Issue: 159


The Russian government plans to privatize a number of its state-owned companies, focusing on the energy and commodity sectors. However, the cabinet faces a challenging task to prove that the latest privatization efforts will be more efficient than earlier controversial moves to sell-off state-owned assets.

Russia’s massive privatization in the 1990s has remained highly controversial, as it was criticized as a rigged sell-off at rock bottom prices to inefficient cronies. Nonetheless, the Kremlin has recently prioritized privatization slogans as a part of its stated policy of modernization. Earlier this year, President Dmitry Medvedev repeatedly suggested expediting the privatization of state-owned companies, including the oil giant Rosneft.

On August 3, Deputy Prime Minister Igor Shuvalov submitted to Medvedev a revised privatization blueprint for 2012-2017. The plan includes the full privatization of the RusHydro and Inter RAO UES energy companies. The government also plans to sell off stakes in the Rosneft and Zarubezhneft energy companies, but will maintain its control by keeping “golden shares.” The state would also retain “golden shares” in Alrosa, the diamond mining giant, the United Grain Company, Rostelecom and the national airline Aeroflot (Interfax, RIA Novosti, August 3).

The government would retain 75 percent plus one share interest in the oil pipeline monopoly Transneft and in Russian Railways (RZD), as well as 50 percent plus one share stakes in the united shipbuilding and aircraft corporations (Interfax, RIA Novosti, August 3).

The government now controls a 75.2 percent stake in Rosneft, the country’s largest oil company that produced 112 million tons of oil in 2010 and aims at raising this to 121 million tons this year. A 15 percent interest in Rosneft was privatized in an initial public offering (IPO) in 2006. The authorities had previously planned to privatize a 25 percent stake in Rosneft by 2015. In April 2011, Rosneft CEO, Eduard Khudainatov, said the management recommended privatizing the company no earlier than in three to five years. In September 2010, Khudainatov replaced Sergei Bogdanchikov, who had served as Rosneft CEO for 12 years.

The Russian finance ministry first suggested privatizing a 27.1 percent interest in Transneft last year. However, the plan encountered strong opposition from the energy ministry and Transneft CEO Nikolai Tokarev. The government currently controls 100 percent of voting shares in Transneft, but the latest plan envisages cutting this to 75 percent plus one share.

Zarubezhneft was included in the government’s privatization plan for the first time. It has a 50-50 joint venture with the state-run PetroVietnam to pump oil at off-shore deposits in southern Vietnam. Last month, Zarubezhneft CEO, Nikolai Brunich, also indicated tentative plans to hold an IPO in 2013.

Following the controversial reforms of the Russian electricity sector in the early 2000’s, this month the government promised to complete the privatization of the RusHydro hydropower giant and electricity exporter Inter RAO UES, as well as the grid utilities FSK and MRSK. The federal government now controls a 58.59 percent stake in RusHydro, but the cabinet wants additional sell-offs. The French EDF, Italian Enel and Chinese Yangtze Power were named among the potential bidders for RusHydro shares.

Russian state-controlled power companies emerged following the break-up of the electricity and heating giant Unified Energy Systems (UES). The 51 percent state-owned UES used to be the largest power company in Russia, generating some 70 percent of the country’s total electricity output and owned controlling stakes in 73 regional energy companies and 44 power plants. From 2002, UES pursued reforms, and it was dissolved by mid-2008 following sell-offs of its entire power generating and distribution assets. In the aftermath of the UES break-up, it was criticized for its perceived failure to achieve its stated goal of attracting much-needed private investments into the country’s electricity sector. UES restructuring aimed at separate competitive (generation, supply and services) and non-competitive (transmission and distribution) businesses. But the latest privatization plan also implies possible sales of power transmission and distribution assets.
The government also indicated interest in a partial privatization of the country’s railway monopoly. The plan apparently includes the privatization of a 25 percent stake in RZD, starting from 2012. However on August 5, RZD head Vladimir Yakunin ruled out the privatization of a controlling stake in the railway giant (Interfax, RIA Novosti, August 3).

The cabinet has also moved to privatize export-oriented companies. The latest privatization blueprint includes Alrosa, one of the world’s leading diamond miners, which plans to produce 34.4 million carats and earn $4.7 billion in 2011. The federal government now controls a 50.92 percent stake in Alrosa, while the regional authorities hold a 40 percent interest. The plan also involves the full privatization of the United Grain Company, but the government would retain a “golden share” in the firm. The fully state-owned company was formed in March 2009, in order to consolidate state-owned grain assets, including stakes in 30 companies based in Russia’s 18 regions.

Therefore, Russian state-controlled companies are now moving towards privatization, following the Kremlin’s orders. However, it remains to be seen whether this latest privatization effort will prove to be more successful than earlier attempts to sell-off state-owned assets.