Russia Privatizes Oil, Gas Industries
Bill Browder, CEO and founder of Hermitage Capital Management spoke at the Stanton Distinguished Leaders series hosted in Georgetown on September 13. Mr. Browder focused largely on his path to becoming the largest foreign private investor in post-Soviet Russia. He was one of the first to realize that Russian capital markets were wholly inefficient and its assets immensely undervalued in the early stages of privatization, with the whole country on “fire sale [with] valuations of all private companies in the country totalling just $10 billion.” These low valuations had some justification, as he quickly found himself in the middle of an aggressive battle against some of Russia’s most powerful oligarchs. Now, another discussion surrounding privatizations has emerged as the Russian government is seeking to offload some state-held assets in order to help shrink current budget deficits to meet the 3 percent federal target.
Bill Browder, CEO of Hermitage Capital Management, at the Annual Meeting 2011 of the World Economic Forum in Switzerland. Copyright by World Economic Forum swiss-image.ch/Photo by Michael Wuertenberg
While Bashneft, a large regional oil producer in Bashkortostan that is majority-owned by the Russian government, has long been on the verge of privatization, it has emerged recently that Rosneft, the country’s largest refiner and upstream oil producer, would be the favorite in an auction. According to the Wall Street Journal, the Russian government has allegedly forced the board of Rosneft to approve a bid on the more than $5 billion acquisition.
The transaction would combine two firms with already heavy ownership stakes from the Russian government, with a 50-percent-plus-1-share stake in Bashneft and a nearly 70 percent stake in Rosneft through Rosneftgas, a government entity. The cost of this acquisition will lead to declines on Rosneft’s balance sheet and cash outflows, which will lower their ability to make large future capital investments and impact future returns. Because of the large ownership stakes and the costs of acquisitions, it is hard to see how this will be more than a wash. Without large synergies resulting from the acquisition, a sale to a private syndicate will have a positive effect on government revenue. Not only does this seem to be a dubious deal for federal finances, but this acquisition further consolidates the domestic oil industry.
The tight relationship between the government and large state-owned enterprises is seen by many as a point of economic concern, as the business landscape may become too politicized or inflexible.
Towards the end of 2015, Herman Gref, CEO of Sberbank, called for the government to discharge its stake and fully privatize the firm in order to stabilize the bank.
However, Deputy Finance Minister Aleksey Moiseev stated that “the question of Sberbank privatization is not on the agenda.”
The story of Hermitage Capital Management and Bill Browder seems more than fitting for the current era, as it remains to be seen whether the current round of privatizations will be successful given present government involvement.