Folks are all atwitter about Russia’s tentative plans to sell off stakes in state companies, including Rosneft, in order to raise money to plug its budget deficit.
A few brief comments.
First, I’ll believe it when it happens. This is something being pushed by Kudrin on fiscal grounds, but it no doubt rubs many powerful people the wrong way. Outside investors, minority or no, can be troublesome because they have an interest in knowing where their money is spent.
Second, since protections for minority investors are so weak in Russia, it is very hard for these pesky folks to see where their money is going, and to do anything about it when they find out it’s going somewhere it shouldn’t. So caveat emptor. Or, as I wrote in one of the very first SWP posts, a fool and his money . . .
Third, the case of Hermitage Capital and William Browder and Sergei Magnitsky should be a cautionary tale about the risks of being a portfolio investor who dares to point out self-dealing and corrupt practices in Russian corporations. So if you invest, keep your mouth shut: you’re just along for the ride. Sound like fun?
Fourth, strategic investment in Russian companies isn’t all that appetizing either. The most recent example of this ConocoPhillips’ decision to sell its stake in Lukoil, an ostensibly private Russian oil company. CP invested in the expectation of doing joint projects with Lukoil in Russia, but that didn’t pan out, apparently due to government intransigence:
ConocoPhillips’ investment into Lukoil avoided a similar breakdown, but it didn’t lead to any new projects or any significant influence in the Russian company’s board room.
“I think all sides were disappointed,” said Ron Smith, head of Europe, Middle East and Africa research at brokerage Chevreux. “It worked well in theory, but just didn’t turn out quite as rosy as they had figured.”
“It’s a major hurdle for foreign companies putting new money to work in Russia,” Smith said. “The real problem is that the Russian government doesn’t see the need for foreign companies to work in [exploration and production] anymore.”
Hardly a story to encourage the return of foreign direct investment, which Russia desperately needs.
Fifth, selling off minority stakes is not privatization in any meaningful sense. Control does not pass into private hands: private money passes into state hands. Big difference.
Sixth, it’s not a one way street. The cage match between Deripaska and Potanin over Norilsk Nickel (which Deripaska says he will “fight to the death“–here’s hoping this is one time Oleg tells the truth!) could lead to the government to take a stake in the company to put an end to the fighting, which is destroying value. Deripaska gadfly John Helmer (who claims that he was the target of a Rusal assassination plot) unwraps the mystery inside the riddle inside the enigma by reading Bloomberg backwards, and claims that Deripaska will be the one without the chair when the music stops. Which goes to show that “privatization” in Russia is not a permanent condition. What the government giveth, the government taketh away.
In sum, if you’re thinking of investing in this simulacrum of privatization, on the outside chance it comes to pass: to learn more about Russian state-business relations, you’re probably best advised to re-watch The Godfather movies.