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13 October 2016

The privatization play. The second act

What is unrolling before our eyes now is an accurate analogy with what happened twenty years ago

The Kremlin can celebrate: it has managed to replenish the federal budget by the currently critically important 1 trillion rubles at a time when, apparently, it has become absolutely obvious that there is no demand for Russian assets. As a result of a tricky transaction, the state-owned “Rosneft” initially bought “Bashneft”, which was controlled by the government of Bashkortostan after renationalization, for 306 billion rubles. Subsequently, “Rosneft” acquired its own shares, owned by the Federal Agency for State Property Management (Rosimushchestvo), for another 700 billion rubles. This monkey business has formally decreased the federal budget deficit more than 30%.

This deal is nothing new in Russian history. We were already informed how “grand privatization” was meant to open new horizons for the country twenty years ago. Of course, the scale was totally different then: in 1995, all of the federal budget expenses together did not exceed 250 trillion rubles prior to denomination, which amounted to 55 billion dollars. In addition, the 650 million dollars in proceeds from the sales of the largest Russian enterprises to “strategic” investors were six times smaller than the proceeds generated by “Rosneft’s” deals. It is true, though, that by the early 2000s, evaluations of companies such as “Yukos” (privatized for 159 million dollars ), “Norilsk Nickel” (170 million dollars), “Sidanco [later TNK-BP]” (130 million dollars) and “Sibneft” (103 million dollars) reached as much as $23, $15, $6.4 and $9.5 billion respectively. But the recently sold shares will definitely not undergo such growth. However, this is not what I would like to dwell on. Instead, I would rather like to draw some parallels with the events of the mid-1990s.

These events, from two decades ago, were a classic sham transaction, which is proved by three circumstances.

To begin with, the sources of the funds are noteworthy. In all cases the buyers were structures which were part of financial groups with the then largest Russian banks at their core. In those days, the banking system was regulated in a rather arbitrary manner, and the largest banks attracted organizations with lots of disposable assets – including state-owned entities. Additionally, the majority of larger banks operated budgetary funds. The paradox lies in the fact that the Ministry of Finance could easily pretend that it distributed the payment of funds more evenly throughout the year. And so it created a situation wherein the banks could use balances to makes loans to the state (and later on refinance them on the market, or with Western partners having gained assets as collateral). In fact, this is exactly what happened. The state budget received the funds as income for a few months, and although these funds were there anyway, they could be spent as additional (and not previously planned) income.

Secondly, it is noteworthy that to a large extent, if not exclusively, the choice of investors was based on political circumstances. Individuals aligned around the government and forming an alliance wittingly called “the Seven Bankers’ Cabal” were all participants of the “great game”. That being said, at least one of the most well-known banks – Vladimir Vinogradov’s “Incombank” (one of the banks that had a sound financial standing) was not admitted to any of the major privatization deals under various pretexts. One certainly should not doubt that the new owners were talented and perseverant people (and this is confirmed by further history), which allowed their companies to maintain a leading position in their respective sectors and become incredibly successful. However, there is no escaping the fact that the Russian oligarchs of the 1990s did not appear out of thin air, but were selected (“appointed”, in fact) to their positions by the power elite to which they remained loyal for years afterwards. This did not in any way resemble the “free competition” that was discussed with such feigned enthusiasm in those days.

Third of all, the privatization deals of the mid-1990s were not really essential. Of course, the budget would have been slightly more problematic without them (a more significant part of it would have been filled not with “real money”, but all sorts of surrogates put into circulation at about the same time). On the other hand, inflation could have been slightly lower, as would the yields on T-bills have been. It may well be that even the 1998 default could have been delayed and the government of “democrats” would have survived until the early 2000s without having to hand over the reins to Vladimir Putin in the days of high oil prices. (Perhaps power would have been taken by the communists for a certain period of time, which would have been even better as it would have initiated a power shift between the right- and left-wing parties – this has brought about “normalization” in some of the Central European countries). However, short-sighted political logic demanded additional spending on the previously robbed people, and the result of the “voting with your heart” that happened later on is now only too well-known. However, let me reiterate, no disaster would have occurred without the “grand privatization”.

And so, what is unrolling before our eyes now is an accurate analogy with what happened twenty years ago.

First of all, this deal is no less feigned, despite being done so in a slightly different manner. The state owns a number of the largest corporations in the commodities sector today that generate substantial revenue streams. Their profits amount to billions of dollars (355 billion rubles in the case of “Rosneft” last year, 403 billion rubles by “Gazprom” in 2015). Both companies are de facto owned by the state and often seem to be guided by purely political motives. At the same time, they appear to be private de jure and determine their dividend policy in a way akin to public corporations. As a result, “Rosneft” distributed as little as 25% of its net profit as dividends last year, although it seems that the state is going to receive 50% from it this year, which is seen as a great achievement. “Rosneftegaz”, 100% owned by the state, has more than 140 billion rubles in its account now, although the company conducts no investment activity and plays the role of a holder of state-owned shares. Here again, we can see a repetition of the 1995 situation – a formally commercial company uses obtained state-owned resources to purchase state-owned property.

Secondly, today’s transactions look equally or even more politicized. For example, “Rosneft” enacted a number of reservations on future sales of its own shares, including a ban on the sales of shares to subjects affiliated with British Petroleum when negotiating privatization conditions. “Lukoil”, practically the only serious private competitor to “Rosneft” was left behind in the case of “Bashneft” (without even having heard the purchase proposal). The deal itself was carried out without a tender whatsoever, which is an outright mockery of the procedure, compared to the minimum difference of the purchase price from the entry price observed in tenders in the 1990s. And I am not talking about the place occupied by Igor Sechin in the Russian political elite at the moment. Obviously, everything boils down to the fact that, as is well-known, privatization is a tool for the “oligarchs” selected by the power elite, even though they have been previously “appointed”. These individuals have never been oligarchs in the true sense of the word. In fact, they have never been anything more than powerful officials.

Thirdly, the new privatization deals serve the same purpose as the old ones: they are meant to give an extra “breath of fresh air” to the authorities, whereas it would be better to train them to hold their breath as long as possible. The federal budget today could be much more easily balanced than in the 1990s, should the authorities at least try to optimize partly meaningless costs, or limit their foreign-policy ambitions and try to establish a dialogue with society instead of continually increasing spending on maintaining “security”. It is quite possible that, as before, additional funds will only promote the country’s movement in the wrong direction. They are not saving the country in the least, as proponents of the existing policy would have us believe. Nobody knows whether the additional costs will extend or reduce the lifespan of the regime, since gradual accommodation of difficulties can be safer than the ultimate financing of social programs followed by a sudden collapse.

One can go on comparing yesterday’s and today’s privatization, or calculate the generated benefits and expenses. The afore-mentioned comparison is enough to draw a blatant conclusion: the Russian authorities have not changed their habits, which have not evolved over time and are not being adapted to the new conditions. It is quite possible that the result will be the same: today’s “privatizers” will leave the stage so that the new rulers can prepare formally totally different – but practically the same – transactions in the future. It seems that even though the times are changing, the logic of the actions and tools employed by the Russian authorities remain unchanged... 

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