February 4, 2011
The main topics for discussion were the reasons for privatization and ways to make the privatization process more efficient. Said Batkibekov said that privatization quite often pursues political goals that may not coincide with economics. Arkady Dvorkovich emphasized that the government and the president consider privatization as a tool to encourage the modernization process. The government should not force companies to innovate, but it should encourage competition, which will be the main driver of modernization. Besides this motivation, fiscal reasons for privatization are also important.
Boris Jordan noted that the privatizations of the 1990s were mainly undertaken to render economic and political change irreversible and to ensure that there would be no way back to socialism. Fiscal goals were not pursued at that time as there was no money in the country and foreigners considered Russia to be too risky. Today, the goals of privatization are to maximize value and to improve competition.
Michael Calvey shared the experience of BVCP, which invests in small and medium companies. He said that it is very hard for smaller companies to compete with state enterprises. Many state-controlled companies are listed and the management has the incentive to maximize shareholder value and increase the market share. Hence these companies not only enjoy competitive advantages but also have motivated management teams. This is why he thinks that it would be great for the government to sell not just minority stakes in state companies, but its entire stakes. He also suggested that the government may distribute shares pro rata among the Russian population. Dvorkovich agreed that lowering the government’s share below a controlling level makes sense. He also suggested that the government could sell its entire stake in VTB and reduce its stake in Sberbank to below a controlling level.
Oleg Vyugin said that the government is now acting like the oligarchs in the 1990s, trying to control the courts and buying more assets. While the government has control over so many enterprises, it has a clear incentive to influence the courts. He also noted that government-owned companies are de-facto controlled by the management. This may also be the case for private companies, but the risk is much lower and Russian law is quite effective in preventing the management from monopolizing control of a private company.
Varel Freeman said that privatization is a powerful tool but insufficient for economic transition. The current wave of privatization is intended to add liquidity to the market and not to pass control to private hands. The trend is positive but incomplete.
Batkibekov said that there are two views on how to ensure that minority shareholders’ rights are protected during privatization. The first view is to sell assets and then to develop institutions to protect shareholders’ rights. The second is to create the necessary institutions before privatization is carried out. The second method involves the risk that government companies might affect the process. Dvorkovich agreed that creating institutions before privatization would not work, as the state companies would try to stop privatization and the government would also slow the process, as it is much more comfortable for the government to work with state enterprises.
Another major topic was the creation of efficient privatization mechanisms. All the panel participants agreed that the government has to ensure that privatization is transparent. Batkibekov said that the main public concern is that the new wave of privatization will represent “shadow agreements” to pass government assets to specific hands. Dvorkovich said that the government will sell all privatized assets on the market. Strategic sales are only justified when the strategic buyer is able to introduce new technology. Meanwhile, the government will have to ensure that privatization does not damage the market, and it will use external consultants to advise on the best timing, size and market to sell the assets.
Batkibekov mentioned that many privatized companies already have minority shareholders and the government needs to make sure that there will be no conflict of interest between the state and other shareholders during the privatization process.
Vyugin said that, in a way, privatization conflicts with the idea of creating a global financial center in Moscow. If the government wants to get more money, it should try to sell the assets on different markets, not just on local exchanges, which may damage the development of the local markets. His suggestion would be to place shares locally but to create ADR programs to provide additional secondary liquidity to increase the attractiveness for foreign investors.