Diamonds for oligarchs: Why privatization won’t save Russian economy?
The ‘big privatization’ started from a sale of Alrosa shares at a bargain price. Why all attempts to save the national treasury turn into discount sales of state assets?
History repeats itself twice: first time as a tragedy, and second time as a farce. The first wave of privatization during the perestroika was a tragedy. It created the class of oligarchs and hasn’t brought any money to the budget. A repetition of this story – called big privatization by the government – looks like a farce, indeed. Or even a tragifarce.
“Kind of import substitution”
First references to the big privatization appeared in media in the end of 2015, when the hopes for an oil price hike have faded, while the Reserve Fund was depleted considerably. On February 1, 2016 Vladimir Putin has conducted a session dedicated to privatization. The President of the Russian Federation named the transparency of sales the key factor in the upcoming privatization and stated that “it is crucial for the state to understand clearly what is being sold and to whom”. Apparently, these words have inspired Igor Shuvalov, who was present at this session, so gross, that he has made everything just the opposite
The first three companies chosen for sale had to become the flagships of the big privatization – but everything went wrong from the very beginning. In July 2016, a portfolio of shares in Alrosa – the leading national diamond mining company – was sold by auction. The government has sold 10.9% shares and earned 52.2 billion rubles. Shuvalov immediately called this deal a success and said that this is a “kind of import substitution”. But cognition comes through comparison.
Apparently, Shuvalov was comparing the current sale of Alrosa shares (Secondary Public Offering, SPO) with its Initial Public Offering (IPO) back in 2013. At that time, 16% of the company shares were sold for 41.3 billion rubles. The calculation seems pretty simple, but this is an illusion. As soon as the USD exchange rate is added into the equation, the math becomes really sad. The IPO in 2013 has brought $1.3 billion, while the July privatization – only $816 million. It is easy to calculate that the cost of 1% of shares has dropped by more than $6 million. And this is not only due to currency exchange rate fluctuations and lower investment attractiveness of the company in the current geopolitical situation.
The government was so rushing to replenish the budget, that the Alrosa portfolio of shares has been sold at the bottom price limit of 65 rubles per share, which, according to Bloomberg, is 3.8% lower than the cost of the shares at the Moscow Exchange during the previous week, and 6% lower than the average cost of Alrosa shares in the first half of 2016. Therefore, the Russian Government has received some 1.5–3 billion rubles less than it could on this deal.
The cost of Alrosa (source: Vedomosti)
The auction itself was conducted using expedited book building process: the book of biddings has been closed after only two days, and it was full. Igor Kulichik, the Vice President of Alrosa, admitted that some Western investors simply had no time to register for the auction. Shares of the global diamond giant have been sold at knockdown price – and then this was reported as a triumph. So who were the main beneficiaries of that deal? Names of the purchasers had never been announced officially, but some information leaked to media. The following companies have been named among buyers of Alrosa: Mubadala Development, Charlemagne Capital Ltd, and the Russian Direct Investment Fund. According to Bloomberg, the state-owned Russian Direct Investment Fund has purchased shares for $50 million – i.e. slightly more than 0.6%. By the way, the Russian Direct Investment Fund had also participated in the Alrosa Initial Public Offering. Apparently, the state companies play the import substitution game by trading with each other. This is the best way to protect state assets against the foreign capital, indeed. But how are these role-playing games related to real privatization?
Spinning, twirling, trying to swindle
Funds flow from one state company to another, while the hole in the budget continues growing. However, the acquisition of state assets by the Russian Direct Investment Fund is a joke in comparison with ambitions of the main governmental cadger – Rosneft. Unwearying efforts of Igor Sechin to appropriate Bashneft turned its privatization into a Mexican soap opera. One day the promptly nationalized Bashneft is being prepared for privatization; the next day it is kept for a rainy day. Like the ghost of Hamlet's father, Rosneft is mentioned in all news related to Bashneft – and these news sound like reports from the battlefield. Initially Rosneft was not interested in purchasing Bashneft, but then Igor Sechin has changed his mind.
The story began when VTB Bank – a consultant for ministers who are not very skilled in economic issues – has submitted a proposal to purchase the state asset directly to Rosneft. Igor Sechin, the Chief Executive Officer, the Chairman of the Management Board, and Deputy Chairman of the Board of Directors of Rosneft, has embraced this idea so strongly that, apparently, nothing can stop him now. The same proposal was submitted to other oil companies as well – for example, to Lukoil. But Leonid Fedun, Vice President of Lukoil – that was initially considered that main contender to acquire Bashneft, – stated this spring that the company won’t throw all its reserves to purchase Bashneft. In the beginning of August 2016, upon dropping the price of Bashneft shares, Igor Shuvalov provided a starting price for this state asset: 306 billion rubles.
In the meantime, heated arguments erupted with regards to Rosneft. Arkadii Dvorkovich insisted that it is unacceptable for a state company to participate in the privatization – while Dmitry Peskov countered that Rosneft is not completely state-owned, but belongs to Rosneftegas. Peskov did not mention that 100% of Rosneftegas belong to the state. To put an end to this vaudeville, the Russian President has first forbidden Rosneft to participate in the privatization of Bashneft and then postponed this privatization until 2017.
However, Sechin did not give up and decided to acquire the asset by all means. He proposed to buy out the Bashneft portfolio for $5 billion – i.e. much higher than its market value. The point is that Sechin can pay only by budget funds, and because the financial position of Rosneft is far from ideal, he would have to request financial assistance from the Reserve Fund again. The state budget won’t get a penny – but Igor Ivanovich will become the head of a huge oil empire. Today Rosneft has a 35% share of the market, but after acquisition of Bashneft it would become an absolute monopolist.
Rosneft financial parameters
A privatization that brings a few pennies to the state budget (or nothing at all) does not look like a real privatization. Perhaps, it is not? As it is known, Rosneft is the third company lined up for privatization. The Russian Government plans to sell 19.5% of Rosneft shares for 700 billion rubles. This deal won’t become a life saver for the national economy, but it would definitely be a real support. Currently, China National Petroleum Corporation is considered the most probable purchaser – but when it comes to the point, other contenders might emerge as well.
It is worth to remember the Presidential Decree № 695 of May 22, 2012 – not much publicized in media – “On Privatization of Federally-Owned Portfolios of Shares in Largest Fuel-Power Complex Companies”. The Decree regulates sales of state-owned portfolios of shares in fuel-power complex companies as follows: “take into account that, prior to the beginning of 2015, Rosneftegas Open Joint Stock Company is considered an investor in regards to fuel-power complex companies whose portfolios of shares are planned for privatization, subject to provision of a financing program for these deals by Rosneftegas Open Joint Stock Company, including use of dividends from shares of companies owned by the above mentioned joint stock company”. Despite the tortuous phraseology, the main idea is clear: the Government of Russia must act in the interests of Rosneftegas during the privatization.
Apparently, Rosneftegas is the most little-known state company in Russia. Mostly because it does not produce anything. The only purpose of this company is to accumulate profits of subsidiary structures on its accounts. Rosneftegas, chaired by above-mentioned Sechin, opposes the upcoming privatization of Rosneft by all means. Back in the end of 2015 Sechin had unambiguously spoken against the privatization of Rosneft stating that the government must first fulfill the state support program for the company in full. This statement may be considered the official position of Rosneftegas. Alexey Ulyukaev, the Minister of Economic Development of the Russian Federation, has openly admitted that the Government of Russia does not have full control over preparations for the privatization of Rosneft. A truly paradoxical situation: the government is unable to manage its own companies.
The very existence of Rosneftegas was criticized numerous times. Being an intermediary between the government and state companies, it allegedly allows these companies to operate on the market more efficiently – while remaining under the governmental control. In reality, Rosneftegas is a legalized shady dual accounting system for these companies. Only in 2014, almost 444.8 billion rubles of unallocated profits have been accrued on Rosneftegas accounts. Contrary to the law, the company hasn’t provided reporting for the year of 2015. Rosneftegas dividends are monies withdrawn from taxable incomes of its subsidiary companies. A governmental offshore company is hiding money from its own government.
Screenshot of Chart “Unallocated profits of Rosneftegas”
Only since this year Rosneftegas – who does not produce anything except for accounting reports – must transfer 50% of its profits to the state budget. In the previous years, the useless company was paying only 25% to the national treasury. At the same time, the state-owned companies are becoming less and less transparent. Rosneft and Gazprom, supported by the Ministry of Energy of the Russian Federation, actively strive for making their acquisitions classified information. In the light of the above, it is not surprising that Rosneftegas might participate in the privatization of its own Rosneft, while the effective manager Igor Ivanovich Sechin gets a considerable governmental credit for this noble cause. The national economy would probably collapse, but who cares? Speaking of the privatization, the conclusion is simple: it has failed.