Russian Stocks Fall on Privatisation U-Turn


Investors fled Russian stocks on Wednesday after Vladimir Putin, the president, decreed that planned privatisations in the Russian energy sector would be cancelled amid signs of intensified infighting among Moscow’s political elite.

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Moscow’s benchmark RTS index closed down 4.4 per cent on Wednesday, outpacing a drop across emerging markets after news emerged that Mr Putin had signed a decree that designated power grids FSK and MRSK, and hydroelectric giant Rushydro, as strategic companies where majority stakes cannot be sold into private hands.

This appeared to remove them from an ambitious privatisation programme drawn up by Dmitry Medvedev, pulling the plug on part of the prime minister’s reform plans before the liberal team he has attempted to install in government even begins work.

Igor Sechin, Russia’s hawkish energy tsar, had clashed with Mr Medvedev’s more liberal team over the privatisation plans, lobbying hard this year for a cancellation of the plans to sell state stakes in energy companies.

The Kremlin decree, signed on Monday but only announced late on Tuesday, indicated a victory for Mr Sechin even as he was sidelined from a formal role in government decision making after he was left without a place in government or in the Kremlin after a decade in power. He was appointed chief executive of Rosneft, the state oil champion.

Igor Shuvalov, the first deputy prime minister who heads Mr Medvedev’s cabinet team – where liberal aide Arkady Dvorkovich has replaced Mr Sechin as deputy prime minister in charge of energy and industry – had been due to hold a meeting on the privatisation plans on Tuesday. But the meeting was repeatedly delayed and news of Mr Putin’s decree came as “a stab in the back at the 11th hour” for the new government, said one official familiar with the situation. “Privatisation in the oil and gas sector has now been basically blocked.”

“Privatisation was going to be the litmus test of the new government and it looks like they’ve been neutered” over the energy sector, said one banker, speaking on condition of anonymity.

Another senior banker with knowledge of the matter said the decree merely set out that the president – and not the government – would determine if, how and when these natural resource companies would be privatised, and did not take the asset sales completely off the agenda. But Dmitry Peskov, Mr Putin’s spokesman, had said the decree outlined that the government stakes were “not subject to privatisation”.

The state official familiar with the situation said the Kremlin decree also removed the sale of a 4.1 per cent state stake in federal power grid FSK, where the state owns 79.1 per cent, from the agenda, which had been planned for as early as this year. But analysts said it was still not clear whether the sale of minority stakes could still go ahead.

“We are at the very least now looking at a dual-track privatisation programme, which is diluted and not going to involve the energy sector,” said Chris Weafer, chief strategist at Troika Dialog, the state-controlled investment bank.

Government Unwilling to Pursue Privatization

“The appointment of Sechin as CEO of Rosneft makes it clear that the government is unwilling to pursue privatisation in the oil and gas sector. Rather than seeing privatisation we could see further consolidation around Rosneft.”

Mr Sechin, whom Mr Putin has also nominated to the board of Rosneftegaz, could now seek to build a giant holding company for the state’s stakes in energy companies, including Transneft, the pipeline monopoly, Zarubezhneft, the state’s foreign oil arm, and Surgutneftegaz, run by a Kremlin loyalist, people familiar with the situation said.

One senior banker said Mr Putin’s attempts at balancing out the conservative forces – headed by Mr Sechin – and the more liberal ones – headed by Mr Dvorkovich – could lead to total paralysis in enforcing policy in the energy sector. “Everyone is baffled as to who is in charge of the energy sector. The problem is there are no institutions, only individuals,” said another banker.

Shares in Rosneft had initially leapt on the news that Mr Sechin was to formalise his role as the power behind the state oil champion. But they fell more than 2.5 per cent on Wednesday as investor concerns grew over the credentials of Mr Sechin, who has led the state’s consolidation of control over the energy sector with the controversial takeover of Yukos, as an investor-friendly chief executive.

Mr Sechin is also strongly lobbying for the management of FSK to take over control of MRSK, a move that strongly reduces any chances of privatisation of the local distribution companies owned by MRSK, a proposed initiative that had been driving the company’s investment case. A decision is now due to be taken on this next month.

Mr Putin’s decree included Rosneft in the list of strategic companies, a move that appears to ringfence the company – and Mr Sechin’s position – from oversight by the Medvedev government. It means it could instead report directly to Mr Putin’s Kremlin.

But it did not exclude a sale of the state’s stake in Rosneftegaz, the vehicle through which the government owns a 75 per cent stake in Rosneft.

An earlier decree signed by Mr Putin on the day of his inauguration also listed Transneft as a strategic company, where state control could not be sold down.