Russian “Privatization”? Only If Putin Is Desperate Indeed
Putin held a meeting with the CEOs of seven state-owned enterprises to discuss the sale of minority stakes in their companies (a move sometimes mischaracterized as “privatization”). Putin frankly admitted that the impetus for this discussion is Russia’s dire budgetary situation. Putin caused some confusion by saying the “new owners of privatized assets must have Russian jurisdiction,” leading some to conclude that he was ruling out foreign investment. Peskov clarified the next day, saying that Russia welcomed foreign investors, but “If the question is about a foreign investor, that’s one thing. If it’s about a Russian investor, it must not be another offshore scheme.”
I consider it likely that this initiative will be stillborn, at least insofar as sales of stakes to foreigners are concerned. Putin said that the sales must not take place at “knockdown prices.” Well, in the current environment, the prices (especially for Rosneft and VTB) are likely to be very low indeed.
This is especially so since foreign investors will demand a substantial discount to compensate for expropriation risk. Savvy investors with long memories will recall that Putin justified expropriating Shell’s Sakhalin II project by saying that the terms of the Sakhalin PSA were unfair to Russia, and that Shell had exploited Russia’s economic desperation when it signed the deal at a previous time of low energy prices. Putin (or whoever succeeds him) could easily resurrect such rhetoric in the future when oil prices rebound. Further, minority shareholders in Russian enterprises–especially state enterprises–have few protections against schemes that divert assets, or which dilute their holdings.
Given that prices are likely to be very low, if there are sales to foreigners, it will indicate (1) that Russia is desperate indeed, and (2) Putin et al consider it unlikely that sanctions will be relaxed anytime soon.
If there are sales, it is likely to be to Russian oligarchs, and in particular those with extensive holdings outside Russia. Just as Putin dragooned them into paying for Sochi and other prestige projects, he could well pressure them into overpaying for stakes in the state enterprises. This would allow him to kill two birds with one stone. It would help stanch the budgetary bleeding. It would also advance Putin’s longstanding goal of onshoring Russian capital. That would fit with the “owners must have Russian jurisdiction” remark. And Putin has substantial leverage to get oligarchs to do his bidding–literally.
Even if partial sales take place, it will be merely a stopgap budgetary measure: it will not indicate a fundamental reconsideration of Russian economic policy. Putin is still obviously a firm believer in the state control/state champion model, despite its manifest inefficiency. Putin prefers the control over resources that state control provides to having an efficient economy. Which is why he finds himself in his current straits.
This is especially so since foreign investors will demand a substantial discount to compensate for expropriation risk. Savvy investors with long memories will recall that Putin justified expropriating Shell’s Sakhalin II project by saying that the terms of the Sakhalin PSA were unfair to Russia, and that Shell had exploited Russia’s economic desperation when it signed the deal at a previous time of low energy prices. Putin (or whoever succeeds him) could easily resurrect such rhetoric in the future when oil prices rebound.
This is what was so mind-bogglingly stupid, and it was the same thing with their annexation of Crimea: the Russians were all congratulating themselves on how oh-so-clever they were, not realising this was a one-shot weapon that would do them serious harm in the long term eclipsing any short term benefit. It’s the equivalent of swiping valuables from your friend’s house when you’re over to watch the football: sure you get the valuables but you’re never invited back and everyone thinks you’re a c**t.
That said, I’m sure they’ll persuade one or two of the supermajors to write them some blank cheques in return for empty promises of “access” to future developments.
Comment by Tim Newman — February 3, 2016 @ 1:38 am
@Tim-I think the Russians generally, and Putin in particular, are very short-sighted. This makes some sense. If they believe–as is reasonable–that the country is on the precipice, and that their political power is tenuous and temporary, focusing on short term gains and saying fuck off to the future is rational.
> not realising this was a one-shot weapon that would do them serious harm in the long term
Now try this thought experiment: imagine what a place might look like where an overwhelming majority of population exhibit behavioural patterns like this. The place will bear a striking resemblance to Russia, won’t it?
Comment by Ivan — February 3, 2016 @ 12:23 pm
To Putin’s credit though, he has used “one shot weapons” continuously for several years now, yet the gun keeps firing. People keep acting shocked when Putin does whatever it is he does. This all goes back to his theft of the Super Bowl ring in 2005 or even Khodorkovsky in 2003. Like Charlie Brown and Lucy’s football or Bullwinkle pulling a rabbit out of his hat, the West keeps thinking this time for sure.
There is a diminishing aspect of this, but it all depends on how quickly other people will react. Hitler was able to keep pulling stunts like this until September 1939 when Britain and France finally decided they had enough. He was genuinely surprised when they declared war because it made no sense to him they’d do it in more unfavorable circumstances to them, and hadn’t all those earlier times. He couldn’t understand that it was precisely all those earlier times that changed the psychology of the West.
Where is the West at now? Well, very divided. There are far more people who have caught on, but there are substantial numbers who still think they can do business with Putin, and that he’s learned his lesson and will be a good boy.
Putin is going to be invited over to watch football a few more times before this is over.
Comment by Chris — February 3, 2016 @ 12:56 pm
I’m sure they’ll persuade one or two of the supermajors to write them some blank cheques in return for empty promises of “access” to future developments.
– See more at: https://streetwiseprofessor.com/?p=9820#comments
I suppose you are closer to the thinking of the supermajors than I am, Tim, but when Putin opens the envelope of these blank cheques I bet they say nothing.
Comment by James Harries — February 3, 2016 @ 6:52 pm
@SWP,
This makes some sense. If they believe–as is reasonable–that the country is on the precipice, and that their political power is tenuous and temporary, focusing on short term gains and saying fuck off to the future is rational.
Now, yes. What is more depressing is that this all started around 2008 when the country was relatively stable and looked as though things might be changing. Which it might have done, had not Putin decided he was the next Katherine the Great.
@Chris,
To Putin’s credit though, he has used “one shot weapons” continuously for several years now, yet the gun keeps firing. People keep acting shocked when Putin does whatever it is he does. This all goes back to his theft of the Super Bowl ring in 2005 or even Khodorkovsky in 2003.
True, but note they are all different tricks, not the same one repeated. But I agree with your point, one does wonder when the West is going to finally call Putin’s bluff.
@James Harries,
I suppose you are closer to the thinking of the supermajors than I am, Tim, but when Putin opens the envelope of these blank cheques I bet they say nothing.
Well, there’s a serious danger they might bounce! More seriously, see this post on how the supermajors bend over and assume the position when it comes to Russia.
Comment by Tim Newman — February 4, 2016 @ 2:03 am
@Tim,
2008 was just an escalation in existing trends – like Russia’s hybrid war against Georgia, which had been going on for years by then. It did not “all start around 2008”, it’s just that Putin ascertained he had enough resources to be able to go to the next phase, while “the West” was eager enough to sell him the proverbial rope to be hanged on. Speaking of mind-boggling stupidity: when you steal those valuables and then invited back for a “reset” party – why would you think that theft was irrational?
Comment by Ivan — February 5, 2016 @ 1:01 am