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Russian Officials Seek to Reassure on Privatization

Russia's success in the eyes of foreign investors hinges on how the country will deliver on its promised privatization process – and officials present at the Saint Petersburg International Economic Forum (SPIEF) were quick to reassure markets that they still mean business.

Russia
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Russia

Russia's fundamentals are stronger than many other countries' but the government will have to navigate the turbulent waters of the euro zone debt crisis to ensure that the economy stays on the right path, and revenues from privatization would help it do this, analysts said.

Outflows of capital in the first four months of this year amounted to $46.5 billion, more than half of last year's total capital flight, and some analysts have blamed a slowdown in the pace of the privatization process for this.

Last year in August, when current Prime Minister Dmitry Medvedev was president, the government published a plan extending the list of companies slated for selloff.

Crown jewel Sberbank , Russia's largest bank by assets, was on that list as well as VTB bank , Novorossiysk Merchant Sea Port, Sovcomflot shipping company, Sheremetyevo and Vnukovo airports.

The plan also stated that the government intended to fully privatize state oil major Rosneft , Rushydro hydropower giant, oil firm Zarubezhneft, electricity trader Inter RAO UES, diamond miner Alrosa, Russian Agricultural Bank and flag carrier Aeroflot .

State stakes in United Shipbuilding Corporation and United Aircraft Corporation were to be reduced by half and the government's participation in Federal Grid Company, oil pipeline monopoly Transneft, Russian Railways and Uralvagonzavod machine-building company was to be cut to 75 percent by 2016 according to the plan.

However, Vladimir Putin became president of Russia again in March and in May a Kremlin decree sent Russian stocks and the ruble plunging, as it effectively canceled privatization plans for power grids FSK and MRSK, as well as hydroelectric company Rushydro, after it declared them strategic companies in which majority stakes must stay in state hands.

Stanislav Voskresensky, Russian Deputy Minister of Economic Development, told CNBC that the u-turn on the privatization of energy companies did not mean the whole program was dead.

"We are on the right track on privatization," Voskresensky said, noting that last year the government sold a 75 percent stake in rail freight operator First Freight for more than $4 billion, one of the largest privatization deals in the infrastructure sector.

"There are a lot of companies to be privatized. Airports, sea ports, etc. – they can be much more attractive to investors than the energy markets," he added, pointing out that the government hired foreign and Russian consultants and investment bankers to make the process more transparent.

Are The Long-Term Prospects Good?

Analysts and investors in the country say that even though the pace of the privatization process has slowed, the long-term prospects for Russia were still good.

People who have invested in the country for many years "are able to reap significant benefits for being in Russia," Dmitri Zaitsev, senior partner, Roland Berger Strategy Consultants, told CNBC, adding that it was "just a matter of time" for the country's problems to be solved.

Analysts have said that privatizing state assets will help diminish hurdles such as corruption or too much red tape and that the government should focus on these kind of benefits first, before thinking about the price at which it sells.

On the other hand analysts say that Russian asset prices are ultimately dependent on conditions on the international markets, where investors are spooked by the continuing crisis in the euro zone.

"It's not so much what Russia needs to do; we need to get over this risk-off phase in the markets," Stephen Jennings, CEO at Renaissance Group said.

"Over the last 10 years this is the strongest performing big market in the world. Ironically it's still the cheapest market in the world [looking at price/earnings ratios]. I think for financial investors who are prepared to be objective and take a medium-term view it's a very good opportunity," Jennings added.

Investors were disappointed that world leaders at the G20 meeting earlier this week did not come up with a solution to the euro zone debt crisis. But Voskresensky, who attended the meeting, said it provided strong hopes that the issue will be sorted soon.

"Europe looks like it's on the right track. They promised they will come up with measures during their summit which will take place next week," he said.

Despite worries over the sharp capital outflows, the situation is very different from the one in 2008, when there was "a lot of foreign money in Russia," Clemens Grafe, chief economist at Goldman Sachs in Russia, said.

Russia is trying to reduce its dependence on oil exports for revenues to the budget and Grafe said that if oil prices continue to fall, the country's economy will slow down and the ruble will weaken but "that's what the economy will need in that situation."

However, Goldman Sachs believes that eventually a solution to the euro zone crisis will be found and the global economy will "be fine."

"If that's true the oil price will probably reverse course at some point later this year. And then you will need the government to tighten," Grafe said.

With nominal wage grown at 15 percent, there are risks of overheating even though currently inflation has fallen to its lowest in about 20 years.

"Russia cannot grow at those rates, these numbers will have to come down," Grafe said.

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