Streetwise Professor

July 29, 2010

Call it What You Will, But Don’t Call it Privatization

Filed under: Economics,Politics,Russia — The Professor @ 9:00 pm

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.

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12 Comments »

  1. [...] This post was mentioned on Twitter by Craig pirrong, Craig pirrong, Craig pirrong, Craig pirrong, Craig pirrong and others. Craig pirrong said: Updated my SWP blog post: ( http://streetwiseprofessor.com/?p=4103 ) [...]

    Pingback by Tweets that mention Streetwise Professor » Call it What You Will, But Don’t Call it Privatization -- Topsy.com — July 29, 2010 @ 10:26 pm

  2. Also, when it finally comes to paying for the looting of Yukos – will Rosneft be the one bearing the cost, or will it find some fools in the West to help it out?

    Comment by Ivan — July 29, 2010 @ 11:46 pm

  3. [...] Streetwise Professor: Call it what you will, but don’t call it privatization [...]

    Pingback by Friday’s Caught On The Web - The Source - WSJ — July 30, 2010 @ 2:00 am

  4. worked for bp.

    read somewhere that bp invested something like less than $5 billion russia and that they have already received back like $20 billion in dividends from their investments. even if putin nationalizes all bp assets in russia today, bp would still have a $15 billion profit from its investment.

    Comment by jack — July 30, 2010 @ 9:55 am

  5. Russia is selling these stakes for one reason and one reason only: to avoid bankruptcy.

    http://larussophobe.wordpress.com/2010/07/30/editorial-the-putins-disastrous-economy/

    It is running a massive budget deficit and it has no other way to plug the whole.

    The key point: What the Kremlin giveth, the Kremlin can taketh away.

    Comment by La Russophobe — July 30, 2010 @ 6:51 pm

  6. Buying minority shares in Russian companies where the government is a major owner, is the best way to cure the sleepiness at night.

    Comment by Ostap Bender — July 31, 2010 @ 6:03 am

  7. Mr. Browder made huge profits in Russia knowing the risks very well- why not to think about investing (after re-watching Godfather for sure)?

    Comment by a. russian — July 31, 2010 @ 6:48 am

  8. “made huge profits in Russia knowing the risks very well”

    Uh, some people do the same when they walk into a casino and play roulette. But the VAST MAJORITY lose their shirts. A national economy isn’t a casino, can’t be. Not until Russians understand that will the country have any vague hope for a future.

    Comment by La Russophobe — July 31, 2010 @ 9:31 am

  9. [...] Streetwise Professor writes about Russia’s decision to sell large stakes in state owned companies – call it what you will, he says, but it isn’t privatization in Russia. [...]

    Pingback by Russia Blog Weekly Roundup – 31 July 2010 — July 31, 2010 @ 1:19 pm

  10. [...] Streetwise Professor writes about Russia’s decision to sell large stakes in state owned companies – call it what you will, he says, but it isn’t privatization in Russia. [...]

    Pingback by Official Russia | Russia Blog Weekly Roundup – 31 July 2010 — July 31, 2010 @ 2:01 pm

  11. 80-year-old human rights activist Lyudmila Alexeeva has her head put on a pike with a Nazi hat on top courtesy of Kremlin-funded Nazi summer camp:

    http://larussophobe.wordpress.com/2010/07/30/editorial-theres-sick-and-then-theres-russian-sick/

    Former first deputy prime minister Boris Nemtsov arrested for peaceful demonstration in support of human rights:

    http://larussophobe.wordpress.com/2010/07/31/breaking-news-boris-nemtsov-arrested/

    This is what foreign investors have to look forward to in Putin’s Russia. That, and then being Magnitskiized.

    Comment by La Russophobe — July 31, 2010 @ 3:00 pm

  12. @a.russian. Investing in Russia is often easy come, very hard go. Not hard because it’s unlikely that you’ll lose, it’s just that the process of losing is often life-threatening.

    The dazzling returns during good times (and this goes to your point too, Jack) are indicative of a return profile with huge tail risk. You get high returns to compensate for that risk, but when the tail risk is realized the losses are extreme, and the non-pecuniary costs can be immense. You look like a genius until you blow up.

    It is, no pun intended, analogous to playing Russian roulette for very high stakes on each pull. People like Browder, Shell, and even Khodorkovsky felt that they had enough influence in the system to avoid the tails. Sorry. Better luck next time. But thanks so much for playing! And there is no consolation prize.

    The ProfessorComment by The Professor — August 1, 2010 @ 7:07 pm

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