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. Last Updated: 07/27/2016

Revenue Shortfall Poses Policy Puzzle

In the face of a serious shortfall of privatization revenue, the Russian government will need to implement "creative solutions" in the remaining months of the year to reach its budget target, but is unlikely to go for a repeat performance of last year's loans-for-shares auctions, investors said Tuesday.

While bankers said the interest of outside investors to Russia's privatization program is on the increase, the government could be hard-pressed to find a formula that would attract domestic capital and boost revenue, which currently stands at a pale 10 percent of the 12.8 trillion rubles ($2.4 billion) target laid down in the budget.

The Russian government has two options -- either to reduce the limitations foreign investors face in certain sectors, such as the oil and gas industry, or to think up new ways of attracting money from Russian investors, said Dan Lubash, managing director of European emerging markets with Merrill Lynch in London.

But the government may find few potential takers among Russian investors, he said.

"The universe of Russian buyers is limited," Lubash said pointing to the handful of large banks and financial-industrial groups that have sufficient resources to enter into large investment projects.

But exactly these groups of potential buyers have been affected by the liquidity crisis in the banking sector and the general non-payment problems throughout the economy.

"If they want to transfer large pieces of assets to Russian investors they would need some kind of creative scheme," Lubash said.

That could be in the form of some kind of watered-down loans-for-shares program, analysts said.

"It could be some derivative of the credit-for-shares [program] ... with wider access and more transparency," said Troika-Dialog chief economist Pavel Teplukhin, adding that the government would "certainly not repeat the 1995 format," which was widely criticized for catering only to a small number of insider banks.

Other bankers, however, pointed to the different nature of this year's sell-off program.

"The main source of revenue will be the sale of smaller stakes in larger companies," said Alex Knaster, managing director of CS First Boston in Moscow.

Most auctions under the loans-for-shares program dealt with controlling stakes, but the State Property Committee has few such stakes left, Knaster said.

Among the major blue-chips in which stakes are slated to be offered this fall are oil concerns Rosneft, Sidanko and Sibneft, insurer Rosgosstrakh and telecommunications holding company Svyazinvest.

Investors predicted Western participation in the auctions would be larger this year, given the increased political stability, positive market development and greater transparency in the auction process.

Western bidders were excluded from most of last year's important loans-for-shares auctions.

It is no foregone conclusion that the banks would be prepared to commit themselves for a loans-for-shares re-run -- even on favorable terms.

"The banks that participated [in last year's auctions] didn't benefit that much -- certainly not as much as they expected," Teplukhin said.

Teplukhin said sluggish stock market growth has capped capital gains, making the banks' investments a less attractive proposition than investments in other securities, such as state treasury bills, would have been.