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. Last Updated: 07/27/2016

State Plans To Sell Off Stakes in Oil Giants

Armed with ambitious plans that hark back to the heady privatization days of the mid-1990s, the government is preparing to sell off huge stakes in four oil giants for about $1 billion this year.

This time around, the government says it is determined to do it right. In a bid to prevent a repeat of the disastrous privatizations that saw lucrative stakes sold for a fraction of their value, the government is calling for more transparency in sell-offs and is planning to amend the law on privatizations.

The government decided late last week to place on the auction block a 19.68 percent stake in Slavneft, a 25 percent plus one share stake in Rosneft and possibly an 85 percent stake in Onako. Also, a 4 percent to 4.5 percent stake in LUKoil will be floated as American Depository Receipts on the New York Stock Exchange.

A 25 minus two shares stake in telecom mammoth Svyazinvest also could be offered later this year, while shares in gas monopoly Gazprom probably will be sold next year, ministers said after a Cabinet meeting Thursday.

The planned oil auctions, slated for the last half of this year, should generate 27 billion to 30 billion rubles ($954 million to $1.06 billion), while the LUKoil float should bring in $400 million, they said.

The privatization target under the 2000 budget had called for revenues of 18 billion rubles ($636 million).

"We intend to send not less than 30 billion rubles to the state budget," Igor Shuvalov, head of the Federal Property Fund, the state's privatization agent, said in televised remarks.

"In 2000 the [economic] situation has improved and in the second half of the year we will be able to privatize a number of properties," First Deputy Prime Minister Mikhail Kasyanov was quoted by Interfax as saying.

Kasyanov said the government was forced to curtail sell-offs last year due to poor economic conditions and a lack of interest from potential buyers.

Privatizations in 1999 netted the state 8.5 billion rubles, the bulk of which came from sales of a 48 percent state in the Tyumen Oil Co. and a 9 percent stake in LUKoil, State Property Minister Farit Gazizullin said at the government meeting.

Sell-offs in the first quarter of this year - mainly a 0.9 percent stake in LUKoil - brought in over 2 billion rubles, he said. Bidding started May 5 on another 1 percent stake in LUKoil.

Details on how the government intends to clean up privatizations are unclear. The government's press office said simply that it plans to make wider use of auctions for the sale of highly liquid assets, and unspecified amendments to the privatization law would be submitted to parliament by Aug. 15.

The Kremlin has long been red-faced about how it carried out the privatizations of hundreds of companies in the mid-1990s. That scheme, cooked up by then-Deputy Prime Minister Anatoly Chubais and applauded by international observers like the World Bank and the International Monetary Fund, saw the government doling out stakes in the nation's biggest industrial companies through loans-for-shares auctions.

Under the auctions, now widely regarded as amateurish and rigged, the stakes were transferred in trust and then sold to insider banks for a fraction of their market value.

But the property fund's Shuvalov insisted that despite the huge, planned oil sales, the days of mass privatizations are over.

"Shares in over 30,000 state-run enterprises could be offered for sale ... [but] an all-out privatization is not on the agenda any more and is not likely to be," he said. "We propose selling small packages of shares in those companies while keeping control in the state's hands for the benefit of both the state and the companies."

If the sales of the oil companies go forward as planned, it could spell the end to the government's previous plan to consolidate its oil holdings into a industry giant called Gosneft.

Kasyanov told Fuel and Energy Minister Viktor Kalyuzhny at the government meeting to examine the ministry's stance on Gosneft, and asked him to present his report within a month.

However, analysts said Kasyanov's order was probably a formality and the planned sell-offs would leave nothing of value for a Gosneft holding.

In the meantime, preliminary plans for this year's billion-dollar sales are being mapped out.

The sale of the stake in Russian-Belarussian oil company Slavneft, the country's eighth-largest oil company, should be completed in October, government officials said. Terms for the sale, which is to be conducted by a Dutch auction house, will be disclosed in August.

The state's entire 85 percent stake in the Orenburg-based Onako will be sold to the highest bidder at a closed auction that could be held as early as the fourth quarter. Analysts say the small oil company's main asset is the location of its refinery near Kazakhstan, a potential gateway for exports to Central Asia.

Shuvalov said oil giants LUKoil, Yukos and Sibneft are already expressing interest in the Onako stake sale, the terms for which are to be released in September.

The terms of the auction for state-owned Rosneft are expected to be unveiled later this month and the sale completed in August.

Morgan Stanley Dean Witter & Co. and Credit Suisse First Boston have been appointed as the state's consultants for the LUKoil float, and they are expected to submit a report to the government by the end of May. While a final decision on the LUKoil ADRs will only be made in June, the terms are expected to be unveiled in August and the float is penciled in for November. The state has a 15 percent stake in LUKoil.

The Svyazinvest sale, which has been announced and canceled before, will only go forward this year if market conditions are favorable, Gazizullin said. The state, which sold a 25 percent plus one share stake in the telecom giant for $1.87 billion in 1997, is expected to retain a 50 percent plus one share stake in the company.

Analysts expressed mixed feelings about the likelihood of the oil sales this year.

"We believe that the Slavneft sale looks the most likely, while the sale of a stake in Onako looks to be the most problematic due to fierce regional resistance to the possibility of outside private owners over this regional company," Troika Dialog wrote in a recent research note. "The possibility of a Rosneft sale is somewhere in the middle."