Russian Roulette: Privatization or Nationalization?

The growing need for money to finance its economic and military needs has revived discussion in Russia about privatization as one of the options to boost inflows into state coffers.

However, the government, eager to avoid mistakes made in the past, doesn't seem to be ready to take any hasty steps.

More than that, there are also voices calling for the nationalization of key industries to bolster economic security as Russia wages war in Ukraine.

The final choice between the two conflicting views could ultimately depend on how things develop on the battlefields in Ukraine, analysts say.

Supporting Market Principles

The chairman of Russia's VTB bank, Andrei Kostin, came up with an initiative last month to relaunch a privatization program to raise money to build a new economic model following the destruction by sanctions of core elements of the Russian economy created in the last 30 years.

He believes that the transfer of state property to private owners on transparent principles is an effective instrument to strengthen market mechanisms, create competition, attract money for the state budget and find solutions for bottlenecks in the country's economy.

Kostin mentioned the United Shipbuilding Corp. as an example, pointing to Russia's needs to significantly increase its capacities for building oil and gas tankers and other vessels. Other privatization targets could include the government's stakes in national operators such as oil pipeline giant Transneft, Russia's Railways, Russia's Post and noncore assets of the defense and nuclear conglomerates Rostech and Rosatom.

Commenting on Kostin's proposal, Kremlin spokesman Dmitry Peskov said it was an interesting idea, but plans for a new round of privatizations are not under consideration at the moment.

Deputy Finance Minister Alexei Moiseev agreed that "big privatization" should take place, but it is not currently on the agenda. Speaking at the International Legal Forum in St. Petersburg last week, he was quoted as saying that it is first necessary to understand what should be sold and who to sell the assets to in order to avoid the mistakes of the loan-for-shares auctions of 1990s. Then, major Russian assets, including oil holdings, ended up in private hands for far below the market price.

Harsh Reality

Speaking at the same forum, the chairman of Russia's Investigative Committee, Alexander Bastrykin, aired an opposite view. "Let's take as a next step a way of nationalization of the main sectors of the country's economy," he was quoted as saying. "We are in fact talking about economic security under war conditions," he said.

The growing role of the state in the current reality has already been cemented by a number of decrees by President Vladimir Putin, including one signed earlier this year that allows the government to block shareholders' rights at companies that fail to fulfill state defense orders.

The government can also introduce external management of foreign-owned assets in response to the expropriation of Russian property overseas and in the event of threats to Russia's national, economic and energy security. Following a corresponding decree by Putin last month, Moscow took under its control the Russian subsidiaries of Finland's Fortum and Germany's Uniper.

Earlier decisions allowed Moscow to get its hands on Exxon Mobil's stake in the Sakhalin-1 development on the Russian Pacific shelf and on Shell's holding in the neighboring Sakhalin-2 venture.

The government's plans for those assets differ. Independent gas producer Novatek is to buy the stake in Sakhalin-2, while Rosneft managers have replaced the heads of Uniper and Fortum's Russian subsidiaries, in a sign that the state-controlled oil major could ultimately get those assets to compensate for the loss of its downstream holdings in Germany.

Putin has repeated several times that Russia would stick to market principles despite sanctions and other pressures. Central Bank head Elvira Nabuillina said this week that part of the shares purchased from foreign companies leaving Russia should be offered on the open market.

Budget Strains

Bigger pressure from the West that under the new EU sanctions package aims to stop the circumvention of existing restrictions could impact Moscow's future thinking. So, too, could the government's growing expenses and shrinking revenues from oil and gas sales.

According to the finance ministry, the federal budget income in the first four months of the year dropped by 22% to 7.782 trillion rubles ($97.3 billion).

Oil and gas income declined by 52% to 2.282 trillion rubles, which the ministry said was due to the high comparison base line last year, and lower prices for Russia Urals crude export blend and reduced gas exports.

The government remains optimistic, pointing to higher non-oil and gas revenues, the successful replacement of Western markets and the narrowing discounts for Urals, which in Apr. 15-May 14 stood at $23.90 per barrel to dated Brent.

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