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. Last Updated: 07/27/2016

S&P: State Control a Risk to Investors

Investors should not discount the risks of betting on Russian companies under state control, ratings agency Standard and Poor's said Monday.

While state involvement can bring such advantages as cheap financing, investors must be aware that the state is unlikely to provide backing when times get tough. "Interventionism, based on the political or personal agendas of highly placed individuals" does not translate into dependable support for investors, "particularly foreign ones," S&P said in a research note.

The ratings agency also said the state might be tempted to use companies under government control as pawns in political games.

S&P's analysis comes as the government pushes to gain control of key sectors of the economy. Recent acquisitions by state-owned Gazprom and Rosneft bring roughly 30 percent of the country's oil production into state hands.

Investors should not assume the state will step in to support to its enterprises during crises, S&P said. "We have not seen obvious examples of this or any formal intention to do this in Russia," said Tatyana Kordyukova, an S&P analyst.

"Even if there is a desire among the political elite to assist a state-controlled enterprise," Russian laws, which limit the government's ability to provide ad hoc financial allocations, could prevent it from happening, S&P said.

Using state backing to gain the upper hand in mergers and acquisitions is a perk of government ownership, but such nonmarket methods can also pose problems for the future. State-controlled companies have an important edge over nonstate rivals, especially for carrying out mergers and acquisitions, said Maxim Shein, head of research at BrokerCreditService. "Here, all roads are open for them," he said.

However, Rosneft's purchase of Yuganskneftegaz last December, which is widely regarded as a state-orchestrated deal, could potentially backfire, S&P said, noting that such an action "could be an additional source of litigation for opponents of the transaction."

The proximity of state-controlled enterprises to the echelons of power also place these enterprises at risk for becoming "vehicles of achieving political ends," S&P said.

Oil company Tatneft, which is controlled by the government of Tatarstan, was forced to borrow funds and pass them to the regional government, resulting in repeated defaults on Tatneft's obligations in 1998 and 1999, the report said.

Even without playing political games, state ownership yields inefficiencies like being slow to make decisions. Bureaucracy can delay sound projects, negating their benefit, S&P said.

Economic Development and Trade Minister German Gref said last month that he did not believe in the state's ability to "effectively manage market sectors of the economy."