Bashkortostan Paves Road to Privatization

By signing a cryptically worded decree, Bashkir President Murtaza Rakhimov showed his readiness to loosen his grip on Bashkortostan's tightly held energy companies.

The law, dated Aug. 19, gives the Bashkortostan Fuel Co., or BFC, and petrochemical holding Bashneftekhim, two of the republic's largest state-owned industrial giants, permission to sell stakes in their subsidiaries.

"This is a milestone in the privatization process," said Emil Maldzhanov, director of corporate finance and management advisory at investment bank NIKoil.

The decree, however, does not offer any details on how the privatization would be structured or the sizes of the stakes to be put up for sale -- and Rakhimov's spokesman, Marat Yamalov, was not eager to divulge any.

"You should think of it more as a liberalization than a privatization," Yamalov said. "Sales of state-owned assets aren't on the agenda yet."

Elected president in 1993, Rakhimov has prided himself on Bashkortostan's ability to avoid Russia's fate. While most of Russia's industrial jewels were sold to a Kremlin-friendly clique of businessmen on the cheap, Bashkortostan companies such as No. 10 oil major Bashneft and the Ufa refinery remained firmly under Rakhimov's control.

The regional government kept industry solvent during Russia's recession of the 1990s by deferring taxes and pouring money into companies in order to maintain a relatively high level of employment. Now that the country's economic crisis is over, the republic's leadership is slowly realizing that the conditions are right to begin opening up its economy.

This realization, of course, was helped along by President Vladimir Putin, who shifted a large portion of tax revenues to the federal budget at the expense of the republics' coffers after he assumed power.

Bashkortostan simply cannot afford to support and control the economy at the levels it is accustomed to anymore, said Yelena Okorotchenko, an associate director at international ratings agency Standard & Poor's.

But Rakhimov's administration isn't going to give up the reins at just any price.

"They don't want a fire sale," Okorotchenko said. "They want investors that will be there for the long haul." But the government's influence and active involvement keeps investors, especially foreign ones, away, she added.

This risk, however, is mitigated by a federal program, scheduled to begin in 2003 and run until 2006, that is to provide 172 billion rubles ($5.5 billion) for schools, hospitals and local businesses badly in need of updated equipment. A fifth of these funds is supposed to come from the federal budget.

The program aims to provide a stable environment for investment in firms such as Bashneft, which extracted nearly 200 million barrels of oil last year. The company has 54,000 employees and accounts for 17 percent of the republic's budget, and for this reason is regarded by officials as a strategic asset. But the company is faced with declining production due to its rapidly aging oil fields. Some Bashneft employees say they would prefer this kind of slow death to an outside investor who could turn the company around -- as well as throw the old management out.

"We really don't know what to think," said an employee in Bashneft's securities department who asked that his name be withheld. "My colleagues and I believe it would be better if Bashneft remained in the government's hands."

BFC, 100 percent owned by the Bashkortostan Property Ministry, holds 63.7 percent of Bashneft. Even if Rakhimov decides to hold on to a blocking stake, the remaining shares would be attractive for a strategic investor, which will most likely turn out to be a domestic oil major, Maldzhanov said. "Foreign companies will probably stay back at first as they gauge Russian companies' experiences at any privatizations," he said. "If the locals perform well, I expect to see foreigners coming in."