russia opens up to western institutional investors

Pavel Gagarin explains the possibilities for western fund managers from next year' $10bn in privatisation of currently Russian State-owned businesses.

russia opens up to western institutional investors


The state has received more than $5bn for its 7% of shares in Sberbank. It is significant that among the buyers were some major western funds that previously objected to investing in Russian issuers.

IPO opportunities abound

The sale of 10% of the shares in RUSNANO, as well as the state share in Vanino and Novorossiysk Commercial Sea Ports (55% and 25.5%, respectively) are scheduled for the spring of 2013. Next year will see a number of other major privatisation deals, worth nearly $10bn.

Investors will be offered from 10% to 25.5% of the shares of the second largest Russian bank, VTB; the heat and electricity generator TGC-5; 25.5% of the airline Siberia; from 7% to 14% of the diamond mining company ALROSA; the fishing company Arkhangelsk Trawl Fleet; 25.5% of Mosenergostroy, who specialise in the construction and renovation of thermal energy plants; 6% of Rosneft and the shipping company Sovcomflot. 

If the shares of the shipping giant are offered to investors on the stock exchange through an IPO, the deal has a potential of becoming the largest one in the coming year.

It has also been confirmed that a trial IPO of Russian Railways will be carried out in 2013. The Russian government is intending to offer investors up to 5% of the monopoly. By 2016, the government is planning to bring its share in the railway company down to 75%.

The sell-off plans for 2014-2016 are similarly grandiose. The state is planning to reduce its share in Russia’s leading airline Aeroflot, the international airport Sheremetyevo, Agricultural Bank and many other leading companies from various industries.

It is clear that in the current period of economic instability, the state cannot expect a bonanza from selling its assets. However, one can wait forever for favourable market conditions that never appear. In the meantime, modernisation of the Russian economy so that it can compete with other WTO partners, is an imperative for today, if not yesterday.

The main reason for Russia’s latest privatisations is the State’s desire to reduce its involvement in the economy; a way to replace an inefficient state owner by an efficient private one.

You can see this for yourselves: today the level of state involvement in the economy is ranging from 40% to 70%. This is an inordinately large amount, even at the lower boundary. Nowadays, the State owns shares in nearly 2,600 joint-stock companies (in half of them the state is the sole owner) and runs 2000 federal state unitary enterprises.

The State involvement in the economy is so enormous that the authorities are trying to reduce it using the power of legislation. Last May, a Bill was introduced that requires state-owned companies to obtain approval of the Prime Minister on all their M&A transactions. On the one hand, it is understandable that the State is trying to limit further expansion of State companies. However, on the other, it is worrying for investors that State-controlled companies are being limited in their strategic plans. Certainly, this is a risk that must be considered.

Six basic principles for the current round of privatisation were recently formulated by the head of The Federal Agency for State Property Management (Rosimushchestvo), Olga Dergunova:

  • The first principle is ‘explain or sell’: if a State-owned company is not part of the State’s strategy for a particular industry, its assets should be sold to private investors; 
  • The second principle balances the interests of national security, social responsibility and economic interests. The mention of economic interests is important, since it means that the state is not going to sell its assets for a trifle, the way that happened during the first wave of Russian privatisation in the 1990s;
  • The third principle is transparency and accessibility of information for potential buyers;
  • The fourth, and most important principle, is a so-called ‘project-based’ approach: new owners should initiate a programme for the development of newly acquired companies and form project teams for the implementation of such programme;
  • Rosimushchestvo will monitor the process, which brings us to the fifth principle – the one of control; 
  • The sixth and last principle is the responsibility of new owners for the future performance of the privatised company.
Buy shares in top companies or make strategic investments in medium-sized ones?
Medium and small foreign investors who wish to participate in the new Russian privatisation will mainly have to settle for the small number of shares that will be placed on stock exchanges, or use the services of Russian private investment banks that have significant administrative resources. 
However, there are a lot of medium-sized companies, which may be interesting for smaller foreign investors. The most attractive ones are companies operating in the areas of minerals processing, food industry, IT, transport and communications. It will be several years before large-scale privatisation of these companies starts. 
However, we recommend that the ongoing formation of the ‘rules of the game’, the enforcement practices and privatisation trends should be monitored today. The best way to do it would be through professional investment experts in Russia.



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