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Author: Vladislav Inozemtsev
The privatization play. The second act
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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Economy