The Privatization Re-Run
Ostensibly, Mikhail Khodorkovsky and Platon Lebedev are on trial for the alleged embezzlement of some 350 million tons of oil from Yukos - an impossible feat that even the most hardened men of the Kremlin would grudgingly admit did not actually occur. Faced with fictitious charges to prove, the prosecutors have taken another tact - dig up everything possible from the privatizations of the 1990s in an attempt to conjure some taint of illegality against the two defendants wholly unrelated to the trial - yet do so in a way that does not threaten the current power structure or state property.
Given the political potency of the topic, it is with surprising timing this week that Finance Minister Alexei Kudrin announced a whole new series of privatizations, selling minority stakes (even to foreigners) in many of the country's most prized state-owned corporations in order to raise $29 billion to cover budget shortfalls.
But how will the pundits be able to make one set of privatizations look like the root of evil and the excuse for democratic underdevelopment, while cheerleading the other as a shining example?
Very few people would ever dispute that the privatizations of the 1990s were a disastrous time for the country, bearing the organization of a car crash. In his series of "Turn to the Left" writings, Khodorkovsky himself commented on the deficiencies of this period and the extraordinary damage the country suffered.
In anticipation of criticism, Kudrin has been careful to work up PR ahead of the new series of asset sales. "We will sell significant stakes in state companies on the market. We plan to keep controlling stakes," he said during a press briefing Thursday.
"(Assets) will be valued publicly, in line with market prices and tenders will be open. We are fully ruling out a situation when somebody sells something to someone at an artificially low price."
But of course the curious buyers, especially from abroad, are wondering just how much control the Kremlin will continue to wield over the corporate governance of these companies, and whether or not they can expect shareholder rights to be abused. One anonymous banker interviewed by the Financial Times commented that the deal appears to be a "PR thing... lip service that they're paying to the markets and financial community." Even the term "privatization" is very misleading in the contemporary state-controlled economy, say other sources.
The companies include the oil giants Transneft, the banks Sberbank and VTB, Russia's largest shipping company Sovcomflot, Rosagroleasing, the Federal Grid Company of Unified Energy System, the Russian Agricultural Bank, and RusHydro and Rosspirtprom with the United Grain Company. Lastly, of course, is Rosneft, which will sell additional stakes after a flotation of 10% of its stock in a controversial IPO. In other words, Rosneft and the main individuals who benefitted from the theft of Yukos will have yet another opportunity to launder ill-gotten assets still under dispute in foreign courts through a foreign sale of stolen property. This time, instead of 10%, we could see an additional 24.1% of the company sold.
By the way, Rosneft is evidently not feeling very confident that it legitimately owns all of the Yukos property it won in rigged auctions. Called to court to testify this week was CEO Sergei Bogdanchikov - but at the last minute he refused to show up, revealing more truth than his testimony ever could have.
Other reports indicate that the proposal will see the state's majority stakes in Transneft, Sberbank and Rosneft reduced by as much as 25 per cent to 51 per cents, and its stake in Sovcomflot and Russian Railways reduced from 100 percent to 75 per cent plus one share.
But who will buy assets they can't control? Alfa Bank analyst Natalya Orlova provided an interesting commentary when he told the Russian media that the government would have no problems in finding investors if prices for oil, the country's key export, remained high. Added Troika Dialog chief economist Anton Struchenevsky, "This is a question of price as usual and the question of what investors will get-namely voting rights-and whether they can influence the company's policies and its dividend policy."
Looking around at the experience of other major foreign shareholders in Russian companies and bi-national joint ventures, there is only bad news. In the middle of this week's news came word that Tony Hayward, the erstwhile CEO of BP, is being sent by the company to Russia to sit on the board of TNK-BP, a move which one analysts says suggests BP may be close to selling its partnership to a Russian oil company. So much for the great British-Russian corporate collaboration.
Despite all the arguments and risks, I expect that many investors will thoroughly ignore all the warning signs and jump right in on this next round of privatizations. If, in the end, it turns out to be handled as well as Kudrin is claiming, it could in theory be a positive development for the country - any situation in which we see the politicians and bureaucracy with slightly less control over the business sector, the better. But if the Kremlin pundits want to cheer this on as the best move to make by the muscular motherland, they are also going to have to drop the false witch hunt going on over in Khamovnichesky court. You can't go in two opposite directions at once.
By James Kimer, Guest Commentator to the Khodorkovsky and Lebedev Communications Center