The privatization process and the state of property relations in 2015

The distinctive features of the privatization process in 2015 were:

• lack of sales of the largest companies’ shares in respect of which specific terms and privatization means are determined by the Russian Government, taking into account market conditions and recommendations of the leading investment consultants;

• leading role of independent sellers that are attracted to the disposal of state-owned assets in ensuring privatization revenues (the sum of transactions made by the Russian Auction House (RAH) amounted to 5.3 billion rubles — more than 72% of all proceeds of the sale of shares, which exceeded the cumulative results of the previous 2 years);

• radical extension of the privatization program due to the inclusion of almost 1.2 thousand real estate units, which significantly changed the whole structure of the property being privatized. This was a result of the transition from the privatization of the shares of companies that own property to the privatization of certain real estate units.

The largest privatization deal of the year was the sale of the Murmansk Sea Fishing Port (100% stake) for 1.027 billion rubles. Also worth mentioning is the big work done in the context of the decisions on the development of the Moscow aviation hub on PPP principles. In February 2016, shareholder agreements were signed between the state and non-state shareholders concerning the consolidation of airport assets in Sheremetyevo and Vnukovo. These agreements will help the state to retain (granted it has blocking stakes) the necessary control over the activities of the united operators and making key decisions.

In total, blocks of shares (participatory shares) of 103 companies were sold in 2015 (in 2014, the nuber was 107) as well as 38 real estate objects (in 2014 — 11 real estate objects). Decisions on privatization conditions were made concerning 35 federal state unitary enterprises (FSUEs) (in 2014 — concerning 33 FSUEs). In general, these results are in line with the trends observed since 2010, except for a significant increase in real estate sales.

Compared with the results of the recessionary year of 2009 which was similar in conditions (the shares of 52 companies were sold amounting to 1.37 billion rubles), it can be concluded that privatization was more efficient in 2015 (the shares of 103 companies were sold amounting to 7.34 billion rubles). The Federal Property Management Agency attributes this to systemic changes in the organization of federal property privatization and the implementation of comprehensive measures of pre-sale preparation and privatized asset management. However, it must be borne in mind that there has been 1.5-fold inflation since that time; besides, in 2009, more than half of the sales were minority interest sales, and non-state sellers did not take part in the privatization at all.

Despite the obvious negative impact the macroeconomic situation and the state of the stock market have on the implementation of the forecast plan of privatization, the Federal Property Management Agency has succeeded in performing the annual budgetary task concerning privatization revenues in the first half of November 2015, ahead of schedule. The goal was previously raised from 3 to 5 billion rubles (excluding the largest sales). Overall, however, the total amount of share sales in 2015 dropped since 2014 by about 8.5% (7.34 billion rubles against 8.02 billion rubles).

The total volume of federal budget revenues from privatization (sale) and use of state property in 2015 increased compared to the previous year by less than 8%. Their absolute value (304.3 billion rubles) is only slightly lower than the maximum value reached in 2012, however, excluding the money received by the Russian Central Bank from the sale of Sberbank shares. The share of non-renewable sources in the structure of the total revenues from privatization (sale) and use of state property has fallen more than twofold and reached 6.5%. This was the lowest value for the entire period from the beginning of the 2000s. The share of revenues from the use of state property, on the contrary, rose from almost 85.4% to 93.5% in 2015.

Obvious difficulties in the budgetary system intensified the discussion on expanding the privatization program in the early 2016. In the list of candidates for the privatization of a part of state-owned shares, there are such companies as ALROSA, Bashneft, VTB, Rosneft, Sovcomflot, but prospects and the format of specific transactions are not yet clear.

The deal that is most ready to be made is the one of transferring Sovcomflot shares, which was put on hold in 2015 and the proceeds of which (12 billion rubles) were referred to in supporting documents of the government bill on the federal budget for the current year. The reduction of the government’s stake in VTB Bank’s capital down to 45% in February 2016, which is recorded in the list of strategic organizations, is due to the need to bring it to the current ownership ratio, after the state corporation Deposit Insurance Agency (DIA) acquired a large block of preferred VTB shares while maintaining corporate control from the government at the expense of the share of voting stock.

In the case of Rosneft, the hampering factor is the situation on the stock market, as the quotes of its shares are now significantly lower than the threshold requirements for the transfer of shares defined in 2014 (the price of the initial public offering of shares in 2006). As for the other two companies, ALROSA and Bashneft, that are qualified as candidates for privatization, it should be noted that they are closely tied to relationship building between the federal center and the regions, which, on top of that, is now formalized in the shareholders’ agreements for these companies signed in 2013 and 2015 respectively.

The requirements for the sale of state-owned assets which were articulated at the country’s top political leadership’s level make the privatization very difficult in the foreseeable future.

These requirements are (1) strict conformity of the privatization deals with the norms of legislation, (2) maintaining the state corporate control of the backbone companies, (3) budget efficiency and avoiding sales at dumping price, (4) prioritizing the quality of the new owners who must possess not only business reputation and experience, but also a development strategy for the acquired company, (5) the presence of the new owners in the Russian jurisdiction and inadmissibility of “gray schemes”, moving assets into offshores or concealing the real owners, (6) purchasers using only their own funds or loans from private banks.

All this obviously indicates impending difficulties in the completion of the privatization program of 2014–2016 at its final stage in the context of a contradictory macroeconomic situation, low investment activity in the country and the external pressure of the sanctions against the leading Russian companies.

Georgy Malginov — PhD, Head of the Ownership and Corporate Governance Department