Streetwise Professor

October 6, 2016

Igor for the Win!, or Privatization With Russian Characteristics

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:19 pm

Today Russia announced that Rosneft has been approved to purchase Bashneft. This despite the Economics Ministry’s earlier attempts to prevent state-owned Rosneft from participating in a “privatization” of a company that had been de-privatized (through expropriation), and Putin’s statement that this was not the best option.

But there’s more! The company was handed to Rosneft on a platter. Rosneft didn’t have to win an auction. There was no competitive tender process. It was just Christmas in October for Igor.

This speaks volumes about how Russia is run. (I won’t say “governed” or “managed.”) In a natural state way, a favored insider was rewarded despite the fact that all economic considerations push the other way. For one thing, privatization has been touted as a way of alleviating Russia’s severe budgetary problems. This will not do that. The decision occurred at a time when all indications are that the economic stringency will endure. There is no prospect for a serious rebound in oil prices, and there is also little prospect of an easing in sanctions. Indeed, Putin’s obduracy in Ukraine and his escalation in Syria may result in the imposition of additional sanctions. Putin’s spending priorities are increasing the economic strain. He plans to increase defense spending by $10 billion, and reduce social spending by less than that. Furthermore, Rosneft is a wretchedly run company that will generate far less value from Bashneft than would another owner, including a private Russian firm like Lukoil.

In brief, a cash-strapped Putin passed up an opportunity to generate some revenue and handed over Bashneft to a company that destroys value rather than enhances it. Such are the ways of a natural state that functions by allocating rents to courtiers. Privatization, with Russian characteristics.

In sum, in the Bashneft deal, Igor wins. And Russia loses.

The only thing that could potentially redeem this is if there was a quid pro quo, namely, that Sechin would relent to the sale of big stake in Rosneft to outside investors. Nothing of the sort was announced today, and perhaps they are waiting for some time to pass so as not to suggest that there was a deal. But I doubt it. I am guessing that Igor will win that argument too.

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  1. As long as this prolongs the economic downturn in Russia, it’s a good outcome. Military spending won’t go down, and the Russian inmates will always stay silent. But it takes more than just the inner circle to keep the GULAG running, and with their pie shrinking, there will come a point when the outer circle will cut the barbed wire on their own to sell it. That’s essentially what happened to the old GULAG/USSR, combined with some pressure from non-Russian inmates (plenty of those in the current downsized GULAG as well). So economic mismanagement is fundamentally the only hope for the territories currently controlled from Moscow. An arms race with the US to accelerate the process would be nice indeed.

    Comment by Ivan — October 7, 2016 @ 11:11 pm

  2. Help to finish an independent film about women of the GULAG.

    Comment by Margaret — October 8, 2016 @ 3:26 pm

  3. The film is based on a false premise. “Last surviving victims of GULAG” have not even been born yet.

    Comment by Ivan — October 9, 2016 @ 1:09 am

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