Privatization Process and the State of Property Relations in 2010

Firstly, we should note the adoption of a large package of amendments to the current law on privatization at the end of spring¹. Most of them can be assessed positively, since they are aimed at enhancing competition, ensuring adequate level of transparency, facilitation of privatization of small facilities. To a lesser degree it relates to such important novations as giving the government the right to make decisions on privatization of state property beyond the “standard” procedures defined by the law on privatization, and attract private dealers for the sale of privatized federal property.

Secondly, drastic reduction of the List of strategic enterprises and joint stock companies, which may be included in the forecast plan (program) of privatization only after the Russian President reaches a corresponding decision, as required by current law on privatization. In its original version of summer 2004, it contained 512 Federal state unitary enterprises (FSUE) and 549 JSC. Over subsequent years the President of the Russian Federation made over 100 decisions provided for change in the list. At the same time, many organizations were struck fr om the list not for their subsequent sale, but in connection with their planned incorporation in the forming integrated structures, which later were included in the list of strategic organizations.

As a result, at the onset of 2011 the list included 149 FSUE (3.4 fold less than in the original list) and 49 JSC (11.2 fold less). Understandably, this reduction took place not in 2010. For example, the list was subject to reduction in 2007-2008. However, 2010 reduction differed from previous reductions by the lack of subsequent creation of integrated structures and predominant reduction of stock companies dominated by those without the control federal stake.

Thirdly, the three year privatization program (2011-2013) approved in November 2010 declared structural priority of privatization. For the first time this privatization program is identified as one of the tools designed “to achieve objectives of transition to the innovative socially oriented development of the economy.” In comparison with the previous similar document, the latest privatization program comprises new objectives:
1.    Reduction of the public sector of the economy aimed at the development and promotion of innovative initiatives of private investors;
2.    Improvement of corporate governance;
3.    Stimulating the development of stock exchange.


Another major difference of this privatization program is the plan to privatize the 10 largest companies, a decision on each of them in terms of time and method of sale will be made separately by the government. Among companies wh ere the state plans to reduce its share by way of sale of packets of shares are: Rosneft, Rusgidro, FSK, Sovkomflot, RZHD, United Grain Company, Rosagrolising, and VTB, Sberbank and Rosselphozbank. Nearly in all above mentioned companies the state must retain corporate control. We are referring to the sale of blocking and minority packets of shares. 

From the practical point of view main trends in property relations in 2010 were:
•       Significant intensification of privatization process (in comparison with 2009, the number of sold packets of shares went up 2.5 fold);
•    Renewable sources remained predominant in the structure of federal budget revenues proceeding from privatization and public property administration, although their share, which grew over last years, fell (to 79%), equaling the level of pre-crisis 2007;    
•    Continued integration of state-owned assets (for instance, formation of such structures as JSC “Systemy Upravlenia” and concern “Automatika”, expansion of United Shipbuilding Corporation, INTER RAO UES, Sviazinvest);
•    Companies with state participation demonstrated relatively weak activity in the corporate control market, which was natural for post-crisis period. Banks excelled in this type of market representing the state in the implementation of anti-crisis measures (Sberbank and VTB);   
•    Some changes have taken place regarding reform of state corporations (State corporation on nanotechnologies was reorganized into JSC “ROSNANO”, whose single shareholder is the State, operation of state company “Housing and Communal Services Reform Fund” was extended for a year. Originally operation of this State Company was to be terminated on 1 January 2012. The law on the State Corporation on Construction of Olympic venues and development of the city of Sochi as a mountain resort was amended abolishing the indefinite nature of its operation).
The privatization program (2011-2013), which was approved in November 2010, is characterized by multi variance. The 3 year forecast plan provides for proceeds from privatization in the amount of 1 trillion Rubles taking into consideration both market trends and certain government decisions on privatization of large companies, which boast of high investment attractiveness. Without these two factors, proceeds from privatization in 2011 are estimated solely around 6 bn Rubles, and in 2012 and in 2013 – 5 bn Rubles each year.

Now, it is rather difficult to discuss feasibility for achieving the stated targets, bearing in mind the specific amount of proceeds from privatization in the federal budget. For the whole period of economic growth only once the target reached the benchmark of 100 bn Rubles, which was in 2003. Although three times (in 2003-2004 and in 2007) this threshold was exceeded by aggregate proceeds from privatization (sale) and administration of public property (taking into account dividends on state shares and rent). The issue is how to avoid sale of state assets at bargain prices. Determination of feasible targets regarding the level of state participation in the economy remains an unconventional task.

G.N. Маlginov – Candidate of Sciences (Economics), Head of the Property and Corporate Governance Department

¹ Please see in detail IEP monthly review «Economic and Political Situation in Russia in July 2010» (pp. 51–54).