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. Last Updated: 07/27/2016

Letting Bureaucrats Take Helm

Prime Minister Viktor Chernomyrdin recently told foreign investors that Russia is bent on changing the shape of privatization, switching from a "speedy, mass" sell-off to a "pin-point" program designed to increase effectiveness. One glimpse of what this might mean is provided by the change of Russian government policy on privatization in the shipping industry.


Arguing that Russia must retain a grip on their activities to protect the nation's strategic interests, the government on Dec. 26 issued a decree calling a halt to further sales of its shares in most of the major shipping companies and ports.


Technically, the decree classified Russia's seven biggest shipping companies and 13 ports into a list of "strategic" companies, a move which effectively excludes any further sales of the state's shares in these companies for three years.


The list includes companies with worldwide reputations such as Novoship, the Far East Shipping Company, Baltic Shipping and the Port of Saint Petersburg. Russia possesses one of the world's larger fleets and the industry generates, by conservative estimate, about $4 billion a year in revenue.


Freezing privatization of these companies means that policy has turned around 180 degrees. It reverses a trend over the past two years of reform, where the Russian government has been moving to get out of business control of the shipping industry.


As recently as last November, Russian reformers pushed through the sale of large stakes in Novoship and the Murmansk Shipping Company in a move obviously timed to sell off shares before a Communist victory in the elections.


But now with the political wind blowing the other way, policy has changed. The motivation for the decision to stop asset sales in this case of the shipping industry seems to be a strange mixture of Cold War ideology and the machinations of Russian bureaucrats.


The official line is that the decision to stop privatization of shipping and port companies was based on Russia's security interests. As a result, the state has decided to keep control only in those companies where Russia's vital strategic interests are affected.


The government says that the ban covers shipping companies that control nuclear-powered icebreakers which might be required to undertake tasks in the event of military mobilization.


The logic seems a bit thin. Can these goals not be safeguarded by other means than retaining an ownership stake? And what are Russia's marine mobilization needs? Behind the flag-waving of "strategic" interests, the more plausible reason for the decision to freeze privatization is that some bureaucrats are hoping that the guarantee of long-term state ownership and board representation will allow them to get back to the fore.


The Ministry of Marine Transport is staffed by former Soviet bureaucrats who used to have the fun of day-to-day command of the operations of some massive shipping fleets, but who now spend their time drawing a functionary's salary and drafting irrelevant memos.


In fact, the situation in Russian shipping boardrooms will be quite finely balanced and it will be very difficult to return to anything like full central control. The industry has already been largely privatized and in most cases the government retains only a 20-25 percent stake. In some cases, like the Primorsk Shipping Company, the stake is down to zero.


Because privatization has already gone so far, freezing the process will not produce any catastrophic results. Management will remained largely unchanged. The change in policy just means that shipping companies could now face more obstructive and potentially corrupt bureaucratic interference.


Because Russian law requires more than a simple majority of votes for more crucial decisions like selling major assets, the government's 20-25 percent of votes effectively has secured a blocking vote.


It remains unclear how the government will use this power. Some shipping companies are complaining that ministries might now expect a veto on the decision to fire a ship's captain or to sell a vessel to raise funds.


The official line from the ministry is that it does not intend to interfere in daily business but, somewhat contradictorily, the state claims the right to oppose attempts to sell off crucial parts of the company that had a security function or other moves which had obviously "negative consequences."


Privatization, which usually just brings in troublesome shareholders, is not generally popular with Russian company directors and, predictably, few companies have been too concerned to learn that privatization has been called off.


Some companies, like Far East Shipping, which has called for a ban on sales of its shares to stop a takeover by foreign investors, greeted the news with approval.


In general, it is probably only the more dynamic companies that will really be affected by the change in policy and primarily in the area of raising corporate finance.


Sergei Teryokhin, financial director of Novoship, one of the world's biggest tanker fleets, told me that the prospect of long-term state control could make life more difficult for Novoship, especially in certain aspects of financing.


The company had plans to sell shares to the European Bank for Reconstruction and Development as part of $367 million fleet renewal program, but Teryokhin said that this now looks problematic.


In summary, the "corrections" to privatization in the shipping industry look like a continuation of the ineffectual bureaucracy of the past years. They are perhaps annoying but they do not give any reason for investors to call their stockbrokers with "sell" orders.





-- Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.