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. Last Updated: 07/27/2016

Next Year's Sell-Offs: Rich, Contentious Lot

The sins of Russia's privatization past are many. No one -- neither the program's architects nor its executors -- will refute this. Be that as it may, an admittance of imperfection is noble so long as its speaker undertakes an effort to rectify the wrong. Perhaps this is precisely what has made privatization in Russia so maddening: Despite the lip service to the double ideals of honesty and openness, nothing has really changed. Worse yet, the plethora of violations -- of which one can only guess the true number -- remains unpunished.


But this is common knowledge. What is important is how the state intends to change the status quo. The privatization program for 1998, in this context, is a long-awaited change of policy. It suggests that the nation's leaders, realizing that they have precious few assets left to sell, have finally given themselves a reality check. As the timeless adage goes, better late than never.


A close look next year's privatization plan reveals three qualities that make it unique: sheer breadth, pragmatism and militarization. The comprehensive list of enterprises selected for denationalization is quite awesome. It contains airports, oil and aerospace enterprises, and, for the first time, arms makers. In fact, it's got just about everything except the Kremlin.


This, however, is nothing but shrewd political tactics. By starting with a fully loaded deck, the government can ensure that it will have plenty of property available once its trump cards have been plucked away by the State Duma. Before any showdown, it is always wise to begin from a position of strength. Maxim Boiko, the head of the State Property Committee and the new kid on the block (no pun intended) who replaced Alfred Kokh, made immediate assurances that the government has no intention of selling every last item on this list. As he stated, a comprehensive package will give the government more room for maneuvering when the Duma picks the list apart company by company.


The state's new outlook for selling federal property next year is surprisingly pragmatic. This is long overdue. For instance, a 6.6 percent lot in LUKoil is priced at roughly 6 billion in next year's re-denominated rubles (approximately $1.03 billion), which corresponds to the market price for a stake of this size. So, if according to the 1998 budget, the government must raise 6.1 billion rubles ($1.1 billion) in privatization revenues, compared to $2 billion this year, then it need only to sell 6.6 percent of LUKoil and its mission will be nearly accomplished. Given the gradual depletion of state assets, this would be the wisest approach.


However, this simplification is fraught with more subtle difficulties. Bureaucrats at the State Property Committee, for reasons of survival, may be inclined to prove themselves busier than just one sale per year. In this scenario, they will feel the need to sell more property than necessary in order to justify their existence (when, at this juncture, the government should be finding ways to keeping possession of its property until more prosperous days).


Finally, there is the military-industrial complex -- auspicious, lucrative and arguably unsurpassed in the world. It is one of the great, undeniable successes of the Soviet period, and represents a marriage of high technology and cash that will make investors (and spies) drool. It is the pride of Russia, and so far has been terra untouchable for privatization bosses.


Part of this complex -- believe it or not -- is listed for sale. A 25 percent stake of MAPO-MiG, which produces Russia's superb attack-aircraft (which account for 55 percent of Russia's $4 billion annual weapons exports) may be sold next year. Fat chance the Duma will approve this sale, but more than anything it shows that the government, running out of quality property, is entertaining some novel ideas.





Gary Peach is the editor of the weekly newsletter Capital Markets Russia.