Unlocking the Value of State-Owned Companies

In 2000-2003, on the eve of privatization, when the government sold its remaining shares in Lukoil, when Slavneft was privatized and divided between TNK-BP and Sibneft, UES was set to be restructured in the 4x4 fashion and Surgutneftegaz had published its last IAS accounts with comments that 60 percent of its shares were treasury shares. The share of the state in the total capitalization for the Russian market then stood at its absolute minimum — just above 20 percent.

At that time private companies reigned in leadership. Yukos was competing with Lukoil for leadership in oil production. Severstal, Norilsk Nickel and Evraz were making acquisitions, expanding into the U.S., Europe Africa and China. Minorities applauded the dividend distribution polices by Yukos and Sibneft, where dividends were distributed very generously and kept pointing at UES, Gazprom, Sberbank and Transneft, who were not able to come up with a meaningful dividend policy.

Since 2004, a lot has happened that was at times severely criticized and other times loudly applauded, but led to unlocking the value of state run companies and increased the share of government controlled companies in the total capitalization of the Russian market to 35 percent from 20 percent.

Yukos was taken apart and sold piece by piece to Rosneft. Sibneft was sold for an enormous sum of money to Gazprom and changed its name to Gazpromneft.  Surgutneftegas ownership structure became completely murky and Surgut stopped publishing its to IAS accounts. Gazfond socked up the entire free float in Rostelcom.

A great deal of value was unlocked just by changing legislature and dropping the FOL (foreign ownership limits) in Gazprom and Sberbank — the capitalization of both stocks increased more than 1000 percent.

Rosneft, stuffed with former Yukos assets, went public, and now looks no less efficient than Yukos. A new state bank that consolidated a verity of banking state assets went public. Sberbank placed additional shares.

The latest in the series of major events was the reform of the utilities sector, which, despite attracting over $40 billion of new funds into the sector, overall slightly increased the participation of the state in the total market cap of utilities to just over 50 percent.

To further unlock the value of its assets, the state could have changed legislature to requite a minimum dividend payout policy from the enterprises which were controlled by the regional and federal government or other entities controlled by state, for example requiring 10 percent or 20 percent of net income to be distributed as dividends to shareholders, including the federal or the regional government and the generous dividends that would raise the value of these companies.

The owner-agent relationship of state-owned companies would come into the spotlight and the Russian people, the real owners of the state-owned part in Russian enterprises, could directly benefit from introduction of such dividend practices.

Though these measures are quite populist in nature, a legislation like this could increase the value of existing state owned Russian companies and could push privately owned companies to compete with state owned companies in dividend policy, and therefore raise the corporate governance of the whole Russian market involve more people into monitoring economics of state run enterprises and hope that they become more transparent.

That part of privatization that focused on the increasing efficiency of Russian companies has been successful. Now many private and partially privatized but state controlled companies are far more efficient than they were. They also earn more money in many cases, because of higher energy and commodities prices and they are now in a position to share these profits.

Back in the beginning of 2000, analysts were astonished by the record $ 1 billion (or 100 percent of profit) of dividends that Sibneft paid to its shareholders that year. In that year Roman Abramovich, the major shareholder of Sibneft, bought himself Le Grand Bleu, a boat 106 meters long.

In 2008, when Sibneft had already changed hands and became Gazpromneft, it still maintained a very generous dividend policy. It paid out an impressive $800 million (25 percent of profits) to its main shareholder, Gazprom. But, I bet Russian citizens would have been quite astounded if they learned of the coherent dividend policy for state enterprises, which allowed them to get at least a fraction of Gazpromneft’s profits. That funding hit Russia’s stores and increased consumer spending levels would yield  a remedy so much needed to fight the crisis. For all these reasons, analysts would also applaud.