The Price is Never Right
Putin decreed that five energy companies are “strategic” and therefore will not be privatized (h/t R). The most important of these companies is Rosneft, to which Igor Sechin is returning as Chairman. Putin argues that the companies are undervalued:
“We can argue that at this particular moment and in the current conditions they are undervalued,” he said in televised remarks. “We would hate to see them privatized for pennies and then sold off for big money.”
Of course, the primary reasons that Russian companies-and especially Russian energy companies-appear “undervalued” relative to comparable non-Russian firms are, inter alia, the huge political risk of operating in Russia, the lack of protection for minority shareholders, the lack of transparency, and extreme deficiencies in corporate governance. That, and the fear if they are indeed sold off for big money later, there is the risk that the Russian government will claw them back, claiming that the poor government has been taken advantage of (especially if foreigners are the ones who profit.)
The Russia discount is, in other words, made in Russia. And Putin’s meddling in the decisions of Russian companies contributes to that, in a big way. It is clear that Russian companies operate subject to the whims of the power structures, and are more vulnerable to these whims than companies elsewhere-including in other emerging markets.
Putin’s remarks are therefore a sort of self-fulfilling prophecy. As illustrated by the fact that the companies became more undervalued immediately after he made them:
The moves helped push Russia’s benchmark MICEX down 3.4 percent on Wednesday, though those losses were also due to fears of the impact of Europe’s financial turmoil. RusHydro tumbled 9.4 percent on the news, FSK and MRSK also posted substantial losses on Wednesday.
On Thursday, the MICEX recovered some 1.3 percent, though shares in FSK were still 6.2 percent lower, RusHydro 4.9 percent, and MRSK 3.8 percent.
Putin wants to get first world prices but live by third world rules. He can’t have it both ways. If he wants to live by third world rules, in which everyone’s property is held at the sufferance of those in political power, the price will never be right.
Keep your eye on Shtokman this week. The entire consortium has effectively been disbanded and the project team demobilised, some of whom are turning up in my circles speaking of four years of wasted effort. Either Total or Statoil are going to walk this week, with possibly Shell taking their place. Rumour has it that it will be Statoil, but my money – based on no inside information whatsoever – is that it will be Total, who will concentrate their efforts on Yamal. Again this is my opinion based on only what I’ve read in the industry journals, I think Total have come under investor pressure to reduce their exposure in Russia and might be looking for an exit from Shtokman. We should know soon enough.
Comment by Tim Newman — May 25, 2012 @ 4:09 pm
I have been watching Shtokman, Tim, to the extent I can via public sources. I’ve heard both Total and Statoil. Maybe both of them, eh? If they’re smart . . .
@Tim-I’m sure you’ll find this totally natural colloquy between Putin and the head of Statoil to be quite amusing.
Professor, clearly, there is a contradiction on the subject of the sale of the assets in the media. Whether the sale of Rosneft news is accurate or not, I think there is no way around the sale of some of the asset as the budget deficits and the depletion of reserve and sovereign funds is going to force it.
I am not aware of miracles since the times of Christ. Things cannot go the way they seem on the surface.
Comment by MJ — May 26, 2012 @ 1:18 am
@MJ-I’ve noticed the inconsistencies. There are clearly two incompatible objectives: to use asset sales to address budget issues, or to maintain control of assets in order to keep the rents flowing to the political elite. You are absolutely right that eventually a choice must be made. These objectives are completely antithetical, and eventually this dialectic clash must be resolved.
The ultimate reckoning can be deferred as long as the price of oil remains high enough to support the state, and Putin’s lavish election promises. If Europe blows up, or if China experiences severe problems, or both-which I view as the most likely outcome, especially given the connection between the two issues-the contradiction will be impossible to maintain. A choice will have to be made.
In the event, I would bet on the elite prevailing over budgetary sanity. Such elites are almost always short-sighted.
Then comes the part that is hard to predict: how will this affect the political dynamic in Russia? I think it will radicalize the opposition and bring more people into conflict with the regime, and simultaneously impel the elite to adopt oppressive measures. How that clash turns out I do not know, other than to say that the results will not be pretty.
@Tim-Alexei Miller has announced that all Shtokman gas will be liquified and sent to Asia due to declining demand in Europe. Which is a reversal of the previous plan to pipe out the gas. Which is a reversal of the previous previous plan to liquify it and send it to the US. What’s your take on the most recent announcement? It seems to me that this will delay the project even more. It further seems to me that this confirms that the entire project is a clusterf*ck.