Privatization: Has the Government Really Changed Its Tune?
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Vladimir Rodionov / The Associated Press
Putin talking with the heads of some of Russia's biggest companies during his meeting with them in the Kremlin this July.
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OVER the next two years, President Vladimir Putin's economic managers plan to sell off stakes in about 10,000 companies. Next year, the plan is to raise 21.6 billion rubles (about $720 million at the budgeted exchange rate) from such sell-offs - with most of the money to be brought in by the privatizations of just 20 major companies. According to a draft privatization program submitted to the State Duma in September, companies to go on the block include the oil companies LUKoil and Rosneft, the Gazprom natural gas monopoly, the air carriers Aeroflot and Sibir, the Samara Aviation Company, the Oryol Steel Plant, three bakeries, an elevator plant, several foreign trade associations and a construction bureau. "The goal for [these 20-odd privatizations] is to put as much money into the federal budget as possible," said Grigory Tomchin, deputy head of the Duma property committee and a member of the Union of Right Forces faction. "But much more will be privatized. How the plan is implemented will depend on the outcome of negotiations between the government and the Duma." Those negotiations will be held amidst sour memories of the Boris Yeltsin-era privatizations, in which the best companies were doled out through a rigged process to insiders. They will also, of course, be occurring in the context of the new Putin era. The new president has pledged not to revisit past privatizations (although his police and prosecutors, whether by chance or design, have hassled some of the oligarchs associated with those privatizations). Instead, Putin has vowed to bring in a fair and orderly approach for new privatizations. That has some saying privatization is about to redeem itself. And indeed, the first privatization under the new regime, the September sale of 85 percent of the Onako Oil Company for just over a billion dollars, has been broadly applauded. "It's the best privatization Russia has had," said Roland Nash, chief economist at Renaissance Capital investment bank. "The assumption is that it's a good sign." Perhaps. But as with all of the other oil company auctions, foreign bidders were kept out. The winner, the Alfa Group of Pyotr Aven and Mikhail Fridman, is a powerful oligarchic structure that happens to be on friendly terms with the new boss. The new government conducting the privatization has already been involved in some very old-style abuses of power - from the Kremlin's persecution of NTV founder Vladimir Gusinsky, to the Communications Ministry's arbitrary shell games with mobile phone licenses, to the government-wide yawn of indifference at talk of Gazprom managers stripping off assets and parking them into a murky new vehicle called Itera. And many of the same institutional problems that plague the economy as a whole - for example, the lack of a truly independent and professional judiciary - are also there to plague privatization. "It's pointless to privatize simply to show the West that we're doing something," said Mikhail Delyagin, an economist who directs the Institute of Globalization Problems. "[Additional] privatizations should take place when the stock market reaches a certain level to maximize profits," Delyagin says, perhaps in 18 months or so. "Or it should be instituted when the conditions are right to create more effective management. The current law was written by bandits for bandits." Others insist the sell-offs should proceed at full steam. "This is a breakthrough year," said Maxim Boiko, a key architect of the early privatizations last decade as head of the advisory non-profit Russian Privatization Center, and then a privatization minister in 1997. Today Boiko heads the Video International advertising company. He argues that the Putin regime's business-friendly tax reforms and the national windfall of a boom in oil prices all argue for aggressive privatizations in 2001. "It's still a priority to put state-owned businesses into private hands." Who Sells, How Much? When the Property Ministry first compiled a list of 2001 privatizations, the plan was to sell off, among other things: . 3.73 percent of Gazprom, for at least $246 million. . 19.68 percent of the Russian-Belarussian oil company Slavneft for at least $107 million. . A 25 percent-plus-one-share blocking stake in state-run oil company Rosneft for $350 million. Since then, the Slavneft sale has been postponed until 2003. And in submitting the 2001 privatization program to the Duma, the government has broken with its practice of listing exact stakes to be sold. Unlike the earlier drafts, the program submitted to the Duma only lists companies to be sold - without saying how, or how much of, each company will go - and then gives an overall revenue target of about $720 million. The government has remained silent on the changes. At the same time, the Property Ministry has submitted a new law on privatization for the Duma's approval - among other things, the law would dramatically curtail the Duma's participation in privatization. And the ministry has announced plans to tighten its grip on sales in the provinces: It will be reviewing the work of regional property commissions, with which it works on a contractual basis, and as many as a quarter of those local commissions could be stripped of their functions. Over time, nearly all such local commissions - which are often under the thumb of the governors in each of Russia's 89 regions - will apparently be replaced. The Property Ministry intends to open from 20 to 25 of its own regional property management offices by the end of 2001, and about twice as many as that over the next three to four years. The demarche against regional privatization teams is consistent with the Putin administration's stated intention of strengthening the federal government at the expense of the regions. But the effort to sideline the Duma is perhaps less in character. The Yeltsin era practice was to seek parliament's approval for an annual privatization program - but in general, to basically ignore the Duma. Now the Putin team - which has a better relationship with parliament thanks to the 1999 electoral success of the pro-Putin Unity Party - is asking the Duma to surrender even that paltry influence. Renaissance Capital's Nash said that might be for the best. "The Duma has substantially slowed the [privatization] process in the past," Nash said. "The new legislation will provide insurance for when [parliament's] honeymoon with Putin ends." Tomchin of the Duma's property committee agreed, saying that some legislators are reluctant to give the government the freedom to carry out its policies. "Ten to 20 deputies don't know the difference between the parliament and the executive branches," he said, and don't let the government do its job. Some Duma deputies have in fact already announced their opposition to the 2001 privatization program. In a letter of dissent attached to the government's draft and cited by Interfax, those deputies complained sales of the 20 major companies targeted would "strike a blow against the economic security of the country." Such talk exasperates pro-privatizers, and goes a long way toward explaining the trial balloon legislation to kick the Duma out of the process. But other observers counter that pushing parliament out will not in itself bring in more transparency or order. "In principle, it's better to be insured against the power of one group of bureaucrats with that of another," said economist Delyagin, arguing that keeping parliament in the game is a simple matter of democratic checks and balances. Devil in the Details There are even more startling changes in the Putin team's proposed new privatization law. Most radically, the legislation calls for allowing shareholders in state-owned companies themselves to initiate the process of privatizing the government's stakes. At the moment, only the government can decide to sell, say, its stakes in LUKoil or Gazprom. It is not clear exactly whether or how it could work otherwise - but the draft legislation before the Duma would apparently permit other shareholders to sell the state's stakes. The law would also divide all state companies into two groups - those with fixed assets worth more than 5 million statutory minimum wages (around $15 million), and those worth less. The more valuable companies could then be privatized under the law only via auctions or by the issuing of proxy securities on Western stock exchanges, such as American Depositary Receipts. The less valuable could be sold in all manner of ways, from auctions to management in trust with an option for the managers to buy. The law would even allow for selling off such companies in "noncompetitive tenders." And as long as everything else is changing, exactly who gets the money from the sell-offs is under reconsideration too. Previously, the Property Ministry received a commission on sales, while the federal government took 83 percent of total proceeds. Next year, the Property Ministry will get no commission, simply a flat 300 million rubles ($10.7 million) on top of its annual budget, while 87 percent of revenues - minus 3 billion rubles (about $107 million) to be paid to investment consultants - would go to the federal budget. It remains unclear how the remainder would be distributed, though some of it would likely go to local governments. Price, Price, Price What is the goal of privatization in 2001? How is the process to be judged? The government is insisting that the key criteria is the price received for an asset, with the more money brought in the better. "The first goal is to get as much money as possible for the state's assets, especially since the flow of Western capital has declined," said Sergei Markov, director of the Center for Political Studies. This new emphasis is in part a reaction to the atrociously bad bargains the Kremlin won for the nation in the sell-offs of 1993-1997, when the industrial crown jewels went for a song. From 1992-1999, the government has earned a total of about $21 billion from its sales of the nation's oil and gas fields, nickel and gold mines and other economic engines. Last year, the government earned a mere 8.5 billion rubles in privatization sales - just a bit over half of what it had budgeted. Many economists and politics-watchers have accepted the new premise that the key to a good privatization is a good price. For that reason, many have applauded September's Onako sell-off. After all, as Property Minister Farit Gazizullin noted, the winning $1.08 billion was the largest sum ever paid in the privatization of a Russian oil company - even though Onako was one of the smaller oil firms to have been auctioned. Moreover, the sale of Onako saw arch-oligarch Boris Berezovsky's Sibneft oil company lose out - a rare occurrence in modern Russia. "One can only congratulate the government for the successful privatization of Onako," said Boiko. The Onako sale on its own overshot the government's stated quest to rake in $1 billion from sales of stakes in four oil companies: Onako, Rosneft, Slavneft and LUKoil. Sales of the stakes in the latter three were later postponed. In fact, the only privatization auction to have brought the government more money was the sale in 1997 of a 25 percent stake in the Svyazinvest telecom holding for $1.88 billion. A Sobering Example However, the Svyazinvest sale provides a sobering example: Initially it was also hailed as a success, largely because of the high price paid. But the auction was not open to all, only to those working in partnership with a Russian oligarch, and some have drawn unflattering comparisons to similar telecoms sold off around the same time in Mexico and Brazil, for far larger prices. In the wake of the Svyazinvest sale, President Yeltsin pushed out then-privatization minister Alfred Kokh. Today, everyone from Svyazinvest's key buyer, financier George Soros, to President Yeltsin himself basically concede that the auction was rigged. So was Onako qualitatively different from Svyazinvest? Or was it simply a rigged deal that cost its participants more, and favored new Putin-era oligarchs like Alfa Group, at the expense of more Yeltsin-era players like Berezovsky? Market analysts tend to wave such discussions aside. Dmitry Avdeyev, an analyst at the United Financial Group brokerage, dismisses talk of an insiders' deal as "Kremlinology." Avdeyev says that "the most important factor was the amount of the bid" for Onako. Others are much more willing to engage in Kremlinology when pondering the Onako sale - and the future of privatization. "Without a doubt, the Onako deal was less politicized [than past privatizations]," said political analyst Markov. "But that does not mean a change of attitude on the part of the government." Markov in fact believes the Putin regime is pursuing two goals with its privatizations: One, to earn more money for the budget, and two, to actively "create vertical oligarchic structures, which are the only ones able to be competitive in such areas as oil." As Markov sees it, the Kremlin's distaste for the Yeltsin-era financial-industrial groups is that they are sloppy in behavior and structure, and arrogantly politicized in their bragging and financial buccaneering. "In the first round [of privatizations], oligarchs grabbed as much as possible, building chaotic conglomerates. And financial problems arose as a result," Markov said. "The second group of oligarchs is smaller, more consolidated. They are more businessmen than politicians." End of the Oligarchy? This summer was a season of hand-wringing on the part of the oligarchs. Media-MOST chief Gusinsky found himself in and out of jail and interrogations, officially as part of an investigation into the suspicious privatization of a St. Petersburg television company. Uneximbank founder Vladimir Potanin that same month saw his Norilsk Nickel privatization also targeted by prosecutors: the 1995 Norilsk auction was one of the most flagrantly rigged of the Yeltsin era. Potanin's Uneximbank had been asked by the government to organize the auction for Norilsk - so Uneximbank promptly put in a laughably low bid of its own, and then declared itself the winner. The Putin-era Prosecutor General's Office found that less than amusing, and in June it asked Potanin to pay the government $140 million for what it called the metal producer's undervalued privatization. Prosecutors called the Norilsk privatization "damage carried out against the state." Meanwhile, privatization tsar Anatoly Chubais worried aloud that the Putin had fallen under the influence of Nobel Prize-winning author Alexander Solzhenitsyn - no friend of privatization. And the master of insider dealing, Berezovsky, began to move into public opposition to the Kremlin - a prelude to Berezovsky's decision this fall to go into self-proclaimed "political exile" abroad. Was the young new KGB president about to start jailing oligarchs, and overturning privatizations - perhaps by renationalizing choice properties? And was all of this harassment of oligarchs, while viscerally and politically popular, helping to guarantee property rights in Russia - or was it undermining them even further? By the end of July, the siege seemed to be over. Putin met in the Kremlin with 21 of the country's most influential businessmen - a sit-down brokered by liberal Duma deputy Boris Nemtsov - to exchange views and promises. The oligarchs emerged smiling: Putin had promised them there would be no re-examination of post-Soviet privatizations, while the oligarchs had promised to obey the law. Nemtsov proclaimed it the "end to the era of the oligarchs." Few joined Nemtsov in such gushing talk. But it did seem likely the Kremlin and the oligarchs were entering a new stage in their relations. As political observer Dmitry Furman recently wrote in the Obshchaya Gazeta paper, "The era of anything goes for oligarchs is objectively over, and not because the Kremlin has decided to put an end to it - it has just passed. The powers-that-be no longer require the assistance of crafty tycoons who know how to convert power into money. "Now, unlike in 1996, the Kremlin is no longer afraid of elections," Furman added, "and can win them without the oligarchs' financial and propaganda support."
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