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Aug. 13, 2012, 12:01 a.m. EDT

Russia puzzles investors with privatization plan

By Anna Andrianova, MarketWatch

Russia’s privatization plan includes more than 1,400 entities, according to Barclays.

NEW YORK (MarketWatch) — As Russia slowly puts its privatization plan in motion, some investors see an opportunity to acquire undervalued assets, while others stay lukewarm as they view state-run companies as mismanaged.

Russia’s government issued a new revised plan in June to privatize the assets of the large state-owned enterprises. The original plan was first announced in 2010.

Russia already has a history with privatization. It was widely perceived that in the 1990s, the Soviet assets were sold at very low prices helping to enrich oligarchs well connected to the elite. In the last decade or so, the government began gradually increasing its stakes in the companies, including the most divisive case of oil company Yukos.

“Companies in Russia are significantly undervalued vis-à-vis the emerging markets and certainly the developed markets’s peers,” said Anthony Moro, managing director and head of emerging markets for BNY Mellon’s depositary receipts business.

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Russia needs to free up some money for upcoming social spending, he said, but given the current economic situation and high energy prices, Russia will not go ahead with the massive privatization as it may not be an opportune time.

Moro said BNY Mellon is interested in companies that are already listed and are going to send more shares into a free float. BNY Mellon works as a depositary for more than 60 Russian companies.

“It is very unlikely that foreigners will be offered these assets at a good price,” said Ian Hague, a co-founder and a lead manager at Firebird Fund, which invests $500 million in Russian blue-chip, large-cap companies.

Hague said that a lot of issues regarding the process of the privatization remain unclear, such as who gets a chance to bid for the companies and when.

“Foreign portfolio investors do not pay too much attention because those are state-owned companies. They are, for the most part, mismanaged,” said Hague. But companies could become attractive if the state cuts its ownership in the companies below the control level, he said.

“The fiscal benefit [from privatization] is still officially viewed as secondary, although we believe its importance has increased lately,” said analysts from Barclays in a research note. “The high dependence on oil and gas revenues in the budget and high upcoming debt maturities encourage development of an alternative revenue source.”

Privatization plans

The latest official privatization plan includes more than 1,400 entities, according to Barclays. Among them are Sberbank, VTB Bank , Rosneft and Sovcomflot.

Sberbank  is Russia’s top lender with equity of about 1.5 trillion Russian rubles ($45 billion). The state plans to sell a 7.6% stake in Sberbank, minus one share.

VTB Bank , the nation’s second-largest lender, sold 10% of its stake to foreign investors in February 2011. The state plans to cut its current 75.5% stake and completely exit its ownership of the company by 2016.

Rosneft , Russia’s biggest oil producer, has approximately 15% of shares in free-float and about 75.2% belongs to the government. The state plans to exit its ownership of the company by the end of 2016.

The government plans to sell a 50% stake in Sovcomflot, minus one share, by the end of 2013, and to eliminate governmental ownership of the Russian shipping giant by the end of 2016. The company, Russia’s largest shipping firm, specializes in crude oil and petroleum products transportation.


But Barlcays analysts said that there are some potential risks linked to privatization, such as a change in the rating evaluation for the companies after the sale of state’s stakes. Rating agencies take into consideration the sovereign support — that will change once the ownership changes hands.

Bondholders may also face potential problems given that many of the state-owned companies have issued bonds in local currencies and in euros.

“This is relevant to Sovcomflot, Russian Railways and RusAg which are 100% state owned at present. In contrast, issuers such as Sberbank, VTB, Transneft and Gazprom do not face technical selling risks due to current lower than 100% ownership,” analysts at Barclays said.

Current market conditions will continue to weigh on the timing of privatization, they said.

Chris Osborne, head of the Troika Dialog USA, said Russia will not give a go to a privatization any time soon. Russia does not have a cash need and its budget is in fine shape. The only exception is Sberbank, which is likely to offer more shares to the market in the near future, he said.

“It is very possible that the budget will be in surplus this year as it was last year,” said Osborne, whose company is a New York-based arm of Russia’s large investment company Troika Dialog, recently purchased by Sberbank.

He also attributed Russian capital outflow, widely spoken about as a negative sign for the economy, to a current account surplus. The state uses that extra cash to buy Treasurys abroad, he said.

Osborne said that it is possible that privatization will occur in several years once a fiscal deficit arises and the market environment changes.

Financial services, food processing, manufacturing, agriculture and retail sectors are contributing the most to the economic growth in the country — not the energy sectors, he said. Those high contributors will present a great opportunity when they go public, said Osborne.

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