RUSSIAN ECONOMY IN trends and outlooks 6.2. “New Privatization Policy”: Risks, Stakeholder Groups, Constraints, Potential Innovations The worldwide downturn that hit economies at the end of the first decade of 21st century, has led to a series of socio-economic changes whose effect in terms of radicality requires quite a long time to comprehend1. Even today, however, it is quite obvious that both leading market institutions of the western world, namely the US institution based on the principles of free market competition, and the European institution governed by socially oriented principles, have failed to offer adequate countermeasures at the initial phase of the crisis, when the first signs thereof emerged. However, it is only the nations with more powerful influence on their economy that have managed to counteract the developments leading to financial and economic collapse. And Russia belongs to this nations, with some reservations though.
However, the effect of a large-scale government intervention in the economy, which is positive amid crisis, may often become adverse at the stage of stable, long-term economic growth.
6.2.1. “New privatization policy” background More than 20 years of experience in Russia and other economies in transition proves that the process of denationalization is complex and time-consuming2. The dynamics of denationalization process in Russia was conditioned by two opposite trends in the 2000s.
On the one hand, the privatization process continued with different degrees of intensity.
The Government of Russia approved annual comprehensive forecast plans (programs) of privatization of federally owned property, which include thousands of FSUEs and shares (interest) of business entities operating in various sectors. As is evident from the previous section, a total number of federal state unitary enterprises and joint stock companies with state participation decreased about 40% in the period between 2007 and 2010. This trend, however, is most typical of the federal level. The number of unitary enterprises changed in different ways at the regional and local levels. Even a formal decrease in the number of state-owned enterprises at the federal level depends largely on the formation of “integrated structures” and state-owned corporations.
The rate of privatization slowed down after 2005, as evidenced by the results achieved in 2006–2008. No positive dynamics was reported until 2010, as evidenced not only by quantity of property assets but also budget revenues. According to the Ministry of Economic Development and Trade of Russia, revenues from sale of privatized federally owned property assets in 2010 totaled Rb 22,67bn3 and outstripped many times the federal budget revenues from Based on the materials provided by the Expert Group on Management of State-Owned Property and Privatization which was established in January 2011 as part of the updated Concept of Socio-Economic Development of the Russian Federation until 2020 (“Strategy 2020”).
More information on the initial stages of privatization in Russia is provided in the following publications:
A.D. Radygin, Ownership Reform in Russia: From the Past to the Future. M., Respublika, 1994; A.D. Radygin, P.M. Entov, Institutional Issues of the Corporate Sector Development: Ownership, control, securities market.
M.: IET, 1999; Radygin A. Privatization, Ownership Redistribution, and Formation of the Institutional Basis for Economic Reforms. - In: The Economics of Russian Transition. Ed. by Y. Gaidar. Foreword by S. Fischer. The MIT Press, Cambridge, Massachusetts, 2003. Chapter 14. P. 395 –459.
However, according to the preliminary data provided in the Report on the Implementation of the Federal Budget as of January 1, 2011, www.roskazna.ru, federal budget revenues from privatization and sale of property assets (including land plots) totaled Rb 18,68bn.
Section Institutional Issues privatization of state-owned property assets in 2008 (Rb 7,19bn) and 2009 (Rb 1,93bn), and outstripped the target figures, which was not the case in the recent successive years. In this trend became more evident, with some reservations though (Rb 121bn) (Rb 126bn, according to the Report on the Implementation of the Federal Budget as of January 1, 2012).
On the other hand, the state has strengthened its influence vs. the 1990s. In the period between 2000 and 2003 the state was focused mainly on optimizing its direct participation in the economy which was retained after the implementation of the programs on voucher (1992– 1994) and cash (1995–1999) privatization. The next 5-year period (from 2004 to 2008) was characterized by a wider participation through acceleration of the activity of companies with state capital participation which tended to expand and diversify their business by engaging in mergers and acquisitions. The strategy of consolidation of the remainder of scattered stateowned assets into integrated entities was accelerated in the period of 2006–2007. The public ownership policy was distinguished by the establishment of state-owned corporations, some of which were industry-specific (aviation and nuclear power industries, shipbuilding industry), including manufacturing of civil products.
Enhanced state participation in the economy was reflected in the national policy documents as well. It is highlighted in the Concept of Long-Term Socio-Economic Development of the Russian Federation until 2020 (which was adopted in 2008) that public sector fits well into the Russian economy and acknowledges that state-owned enterprises play an important role. However, with regard to state-owned property management (of specific categories of property assets), this document provides for basically the same approaches envisaged in the previous government programs implemented in the 2000s. The requirement that the composition of state-owned property must comply with not only powers and functions of the state, but also structural changes in any given industry, can be considered an important feature.
The recession of 2008–2009 was not responsible for a large-scale growth in the public sector, because the anti-recessionary strategy was focused on minimizing direct participation of the state in the capital of distressed private companies and banks. Furthermore, according to the official data provided by the Rosstat (without consideration of pyramidal ownership in the mixed sector) testifies to the fact that the public sector continued to decrease its participation in the economy in the period between 2008 and 2010 as well. However, most of expert estimates show that the state increased its participation in the Russian economy due to both activities of mixed sector companies in corporate control market and indirect recession countermeasures taken by the state. In particular indirect influence of state-controlled banks and entities acting as its agents in taking recession countermeasures, increased.
According to the EBRD, by 2009 the public sector of the Russian economy increased from 30 to 35% of GDP. Though this data is very illustrative in terms of dynamics, it seems to be underestimated as applicable to the public sector scope. According to the available estimates (Troika Dialog, 2008), federal and regional authorities controlled about 40% of capitalization in the Russian stock market at the end of 2007 vs. 24% in 2004. According to the Expert-rating, by the beginning of 2008 “the depth of ownership concentrated” in the hands of the state stood at 40 to 45%, whereas in 2009 this indicator stood at within 50%, according to various expert assessments.
Active “structural” privatization policy was commenced at the end of 2009, when the Russian economy began to recover from acute recession phase. The following “standard” objectives of privatization were set in the period between 2006 and 2008: generate federal budget revenues, undertake privatization of the property assets which were not involved in govern RUSSIAN ECONOMY IN trends and outlooks ment functions, undertake incorporation of unitary enterprises. Public statements of top officials of the Government of Russia in September-October 2009 made notes for the first time of a “structural” privatization aimed at reducing the scope of state direct participation in the Russian economy, enhancing competition in industries, generating investments in long-term corporate development, improving the effectiveness of large companies with state participation.
A new stage of privatization was started when the Government of Russia (November 30, 2009) approved another Forecast Plan of Privatization of Federally Owned Property for 2010 and the Guidelines of Privatization of Federally Owned Property for the Period of 2011–2012. The plan had some specific features, namely generation of extra budgetary investments in the development of privatized companies was set as a top-priority task; the list of sectors (industries) scheduled for privatization was expanded essentially; focus was placed on privatization of a series of the largest (budget revenue generating) companies. The foregoing allows one to say that a “new privatization” policy was launched in Russia at the beginning of 2010.
In general, two groups of preconditions for the transition to “new privatization” can be underlined. The first group included fundamental factors which are not linked directly to the recent worldwide downturn:
- the state has an ambiguous and controversial status (as lawmaker, regulator and direct participant in large companies);
- there is no appropriate environment in place to ensure fair competition and enhance investment activity through private businesses in industries with high level of direct state participation;
- large companies with state participation show active behavior in acquiring assets, including extension of non-core assets;
- there are objective limits which interfere with higher quality of corporate governance in public sector companies;
- there are many public sector entities which are not effectively managed and supervised by the state.
However, radical changes in the contents of state privatization policy in 2010, which were focused on the structural component thereof and denationalization of the largest companies, specific sectors, were, in our opinion, largely conditioned by awareness of the issues which became topical as a result of the recent downturn (second group of preconditions):
- the state is strengthening its participation (influence) in the economy amid crisis, and the level of direct state participation is too high;
- the risk of that in the post-crisis period the state would strengthen its participation in the economy due to uncertainty about what may happen with companies’ shares pledged as collateral for state anti-recessionary support if such companies fail to discharge their loan obligations;
- poor competitiveness of a series of public sector large companies, the need to undertake restructuring and technological modernization thereof;
- the need to generate considerable extra budgetary investments, including the development of the key sectors within the infrastructure framework;
Section Institutional Issues - there are stronger doubts about prospects of rapid post-crisis growth in the Russian economy; social budget expenditures have been extended, which may result in the need to impose stronger budget constraints (looking for more budget revenues).
In general, the issues of structural effect of privatization for the development of the Russian economy have been placed to the foreground of ‘state agenda’. In our opinion, the privatization policy’s structural approach is evidenced by both official statements and actions which have been undertook over the last two years to update regulation of privatization, reduce drastically the list of strategic enterprises, plan privatization of the largest public sector companies, improve corporate governance of companies with state participation.
First, a series of significant updates and amendments were made to the Federal Law “On Privatization”1, in particular:
- the transfer to mid-term planning of privatization of federally owned property was undertaken, the Government of Russia was entitled to define possibilities to draft forecast plans (programs) of privatization for a period of 1 to 3 years (previously, forecast plans were drafted annually) and add new entities to privatization plans;
- the Government of Russia was entitled to make decisions on privatization of state-owned property of the scope of the ‘standard’ procedures established by the Federal Law “On Privatization” for the purpose of creating conditions for investments, promoting the development of the stock market, as well as modernization and technological development of the economy;
- the Government of Russia was entitled to delegate to legal entities the functions of seller of privatized federally owned property assets;
- the use of the principle of standard price of assets subject to privatization was abolished;
standard price was defined pursuant to the procedure for minimum price at which such assets may be sold, established by the Government of Russia;
- conditions for privatization of small federally owned property assets were simplified, potential buyers were granted more assess to be able to participate in privatization (the possibility to sell state-owned property assets in electronic format was defined; the relevant procedure was refined through public offering – Dutch auction; the required amount of tender or auction guarantee was reduced);
- transparency requirements for privatization procedures were upgraded.
Second, drastic changes in the list of strategic enterprises and joint stock companiesshould be mentioned in the context of extension of the privatization base: the number of eligible organizations was more than halved, down to 200 in 2010. Making industry-specific examination of the delisted organizations, it should be noted that a major part thereof (about 1/4) are somehow linked to the transport industry and the relevant infrastructure.
Third, plans on privatization of the shares of 10 largest Russian companies and banks (Rosneft, RusHydro, Federal Grid Company of United Energy System, Sovcomflot, Sberbank of Russia, VTB Bank, United Grain Company, Rosagroleasing, Russian Railways, Federal Law No. 106-FZ, dd. May 31, 2010, “On the Amendments to the Federal Law “On Privatization of State-Owned and Municipal Property””.