Privatization process and property relations in 2012

This document was repeatedly amended and updated during its effective period. The preceding year saw a lot of events: 24 respective legal acts and regulations were issued against 11 ones in 2011.

The largest difference from the first version was serious radicalization of privatization plans for the largest companies in which the state intended to reduce its interest by clarifying its terms and scope, as well as extending the list of assets eligible to privatization.

It was stated that by 2016 the state would cease to hold any interest in six (Sovcomflot JSC, VTB Bank, United Grain Company, Rosagroleasing, Federal Hydrogeneration Company (RusHydro), Russian Agricultural Bank) out of the 10* companies which were originally enrolled into the privatization program. Minority and blocking interests for sale in 2012-2013 were specified for all of the companies, except Rushydro, Federal Grid Company of United Energy System (FGC UES).

Zarubezhneft, INTER RAO UES, Sheremetievo International Airport, Aeroflot, ALROSA (the state is to cease to hold any interest in these companies by 2016), Transneft, UralVagonZavod Scientific & Research Corporation (the state is to reduce its interest to 75% plus one share, like in the FGC UES), United Shipbuilding and Aircraft Building Corporation (to 50% plus one share) were added to the list of the companies which were originally enrolled into the privatization program.

In addition, a state-held interest in ROSNANO OJSC is expected to be reduced to 90% by issuing and placing new shares, and an interest in Rosneft is expected to be sold beginning with 2013, and the state is to cease to hold any interest in this company by 2016. Rosneftegaz OJSC (allowing it to act at investor during privatization of fuel-and-energy companies by the beginning of 2015, provided that a program of financing of these transactions is available, which would allow for the use of dividends from the shares of the companies owned by the said OJSC).

A Central Bank's interest of 7.58% in Sberbank was sold at Rb 159.3bn in September last year, thereby making this privatization the biggest transaction of that year. Furthermore, the following assets were sold through government-designated private sellers (basically investment banks): a state-held interest in SG-Trans OJSC (a100% interest was sold at Rb 22.77bn), Vanino Commercial Seaport (the Khabarovsk Territory) (a state-held interest of 55% in the company or 73.33% of common shares was sold at Rb 15.5bn), Apatite OJSC (a state-held interest of 26.67% or about 20% of the company's charter capital was sold at Rb 11.1bn), the Murmansk Commercial Seaport (a 25.5% interest was sold at Rb 2.5bn), as well as an interest (50% less one share) in the United Grain Company was sold at Rb 5.951bn through issuance of new shares. A total of 273 ownership interests in joint-stock companies were sold as part of privatization in 2012, being one fourth less against the preceding year (359 joint-stock companies; 134 joint-stock companies in 2010). Thus, the amount is higher against the recession period of 2008-2010 and lower than in the period between 2006 and 2007.

A fairly negative background became the critical distinction between the privatization process in 2012 and the preceding year, for the first time over the last few years.

Basically, it was triggered by the well-known events concerning which happened with Oboronservis in the fall of 2012. Furthermore, the events concerning transactions on sale of investment-attractive assets made a great contribution to it. In particular, the results of the United Grain Company's (UGC) private offering and privatization of SG-Trans OJSC were challenged. Resale of MECHEL's interest in the Vanino Commercial Seaport, which followed the course towards higher transparency and ‘deoffshorization' of the national economy announced at the top political level, became even a bigger event. The news about the deal surfaced in January 2013, 45 days after MECHEL purchased the said interest from the state.

According to the data provided by the Head of the Ministry of Economic Development and Trade of Russia in his speech at the Russian Government's meeting held on February 7, 2013, property management revenues totaled Rb 433.6bn in 2012, of which revenues from privatization accounted for Rb 201.5bn. One might assume that the latter value is the sum of revenues generated from sale of shares (Rb 43.9bn), which are referred to sources of budget deficit financing, and the revenues generated by the Central Bank of Russia from sale of its interest in Sberbank whose amount is determined as the difference between the amount of revenues, sale price of the said interest (Rb 159.3bn) and their book value, net of expenses from the sale of the shares, with certain reduction of a part of the revenues, which is payable to the federal budget, generated by the Central Bank of Russia at 2012 year-end. The 2012 results are the highest in absolute value throughout the entire 2000s not only for the revenues from privatization (sale) state-owned property, but also for the revenues from its utilization which are basically characterized by record-breaking allocation of dividends (Rb 212.6bn).

In addition, the largest for the Russian M&A market acquisition of TNK-BP (completed in March 2013) by Rosneft was among the marketable events in the field of property relations, as well as the decisions (made in November 2012) to reconfigure state participation in the electric power industry, which allowed for renaming Interregional Distribution Grid Companies Holding JSC (in which the state holds an interest of 54.52%) into Russian Grids OJSC by contributing almost the entire state-held interest in the FGC UES (79.55%) to its charter capital as payment to Russian Grids OJSC for issuing new shares to replenish the charter capital of the same. Rushydro OJSC charter capital is expected to increase too, with a minimal state-held interest of 60.5%. The government plans to contribute its interest in four OJSCs (2 minorty and 2 blocking interests) and no more than Rb 50bn in cash through federal budget allocations for 2012.

A wide range of forecasts of privatization revenues were made within the first moths in the current year: Rb 60bn were forecasted by the Ministry of Finance and Rb 100bn by the Ministry of Economic Development and Trade (instead of Rb 427bn specified in the explanatory note to the Draft Federal Budget for 2013 and Planning Period of 2014-2015, which was submitted to the State Duma in the fall of the last year). The implementation of the proposals to expand the privatization plan, which were prepared by the Ministry of Economic Development and Trade in mid-March, can generate up to Rb 1 trillion by selling a state-held interest in five large companies. However, aggravation of the macroeconomic situation (e.g., the likelihood of a recession) may have an adverse effect on the implementation of the privatization program.

Malginov G. N. - Ph.D. in Economics, Head of Ownership and Corporate Governance Department.

* Sovcomflot JSC, VTB Bank, United Grain Company, Rosagroleasing, Federal Hydrogeneration Company (RusHydro), Russian Agricultural Bank, Sberbank, Russian Railways, Federal Grid Company of United Energy System (FGC UES), Rosneft.