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. Last Updated: 07/27/2016

Privatization On Track Without Foreign Banks

Within the last week the Russian government has cut foreign advisers out of two of this year's biggest privatization deals, affecting the national telecoms and power companies, but investors said Thursday that the government's change of plans signified "no revolutions" in the overall sell-off process.


Bankers in Moscow and London said the thrust of privatization remains intact in spite of important changes in the terms for selling off stakes in the Svyazinvest telecommunications holding and Unified Energy Systems, or UES, utilities giant.


A Moscow-based analyst, who asked not to be identified, said the demise of foreign consultants in the two sell-offs should not be overestimated.


"The issue of who acts as consultant is of secondary importance," the analyst said. "The real issue is whether foreign investors will be allowed to bid."


"It is difficult to generalize policy from these highly visible sales of some of Russia's largest companies," said Christopher Granville, head of research with United City Bank in Moscow.


The continuation of regional sell-offs and the high-profile government attempt to bankrupt AvtoVAZ indicates that the policies of privatization are still on track, Granville added.


"The bottom line is that privatization, the sale of assets, continues," said Dan Lubash, managing director of European emerging markets with Merrill Lynch in London.


The plans on how exactly to sell the state's assets, however, have changed markedly since last Friday.


First the authorities called off a convertible bond offer in UES and replaced it with a cash auction for a 8.5 percent stake. The deadline for bids in that auction is Dec. 23.


Investment bank CS First Boston had been global coordinator of the bond offer, but a source familiar with the deal said the government had opted for a local auction in order to raise quick cash, rather than to wait for the preparations of the bond to run their course.


But the price paid by the government for a quick sale could be high in terms of lost revenue, the bankers said.


"An international offering would draw more investors than an auction in Moscow," where it would mostly attract the emerging markets funds already active in Russia, said Danielle Downing, emerging markets strategist with Salomon Brothers in London.


Strong international demand for American Depository Receipts issued by Russian utilities such as Mosenergo suggests that an international bond offer would do very well, she added.


UES itself is arguing that the auction should be put off until next year.


A management source said 22 percent of UES stock is already held by foreign investors, and that if they pick up part or all of the 8.5 percent stake at next month's auction they will be in a position to veto company decisions, Interfax reported.


A second privatization about-face came when the government this week relieved its Western consultants for the tender of the Svyazinvest telecommunications holding, a consortium led by the N.M. Rotschild merchant bank, of their duties.


Russian telecoms minister Vladimir Bulgak confirmed Thursday that MOST and Alfa will be appointed in its place to run the auctions for up to 25 percent of Svyazinvest stock.


This suggests the continuation of a trend, known from last years loans-for-shares auctions, where "very valuable assets will be offered first to domestic investors," with little access for outside bidders, Granville said. But he added that the outcome of government deliberations on the Svyazinvest tender is still not known.