Mark Adomanis writes: \u00a0You know that Russia is in\u00a0real trouble when liberal economic policies start getting batted around. This is particularly true of\u00a0“privatization,” a\u00a0typically boring and\u00a0technical term studiously avoided during periods of\u00a0stability and\u00a0then suddenly thrust back into\u00a0the public consciousness during periods of\u00a0crisis.<\/p>\n
In\u00a02009, the\u00a0last time that oil prices tanked and\u00a0the government’s coffers became a\u00a0bit sparse, the\u00a0Kremlin talked openly about privatizing a\u00a0number of\u00a0state-owned companies. Impressive sounding plans were released, and\u00a0officials mouthed the\u00a0pieties about “attracting investment” and\u00a0“improving efficiency.” Nothing came of\u00a0this campaign (oil prices rebounded quickly enough that the\u00a0pressure on\u00a0the state’s finances quickly abated and\u00a0the state’s economic role actually grew), but it established a\u00a0precedent that is being repeated.<\/p>\n
As the\u00a0economy experiences a\u00a0nasty recession and\u00a0pressure on\u00a0the government’s budget mounts, the\u00a0Kremlin is once again mulling the\u00a0initiation of\u00a0a large-scale program of\u00a0privatization.<\/p>\n
Both in\u00a02009 and\u00a0in 2016, the\u00a0official justification for\u00a0privatization is familiar: privatization will both raise money to\u00a0plug holes in\u00a0the budget and, perhaps even more importantly, will make the\u00a0economy as a\u00a0whole more competitive. It’s no secret that government-owned companies almost always lack the\u00a0incentives needed for\u00a0long-term profitability.<\/p>\n
Compared with private sector peers, state-owned firms tend to\u00a0have some combination of\u00a0bloated payrolls, unrelated assets (think golf courses), or suspiciously large capital expenditures.<\/p>\n
Gazprom’s capex as a\u00a0percentage of\u00a0sales was somewhere between three and\u00a0four times the\u00a0level of\u00a0comparable publicly-traded companies. It’s easy to\u00a0imagine that more profit-oriented managers would do a\u00a0better job.<\/p>\n
If the\u00a0government’s main goal is to\u00a0increase the\u00a0economy’s efficiency, privatization is an\u00a0excellent tactic. But, rare indeed is the\u00a0instance in\u00a0which a\u00a0government single-mindedly pursues greater efficiency.<\/p>\n
According to\u00a0the Kremlin’s public statements, privatization is going to\u00a0achieve the\u00a0following goals simultaneously: 1) increase the\u00a0economy’s competitiveness, 2)\u00a0raise funds to\u00a0plug the\u00a0hole in\u00a0the budget, 3) maintain state control of\u00a0“strategically important companies,” 4) avoid a\u00a0“fire sale” in\u00a0which the\u00a0government “gives away” valuable assets, 5) limit the\u00a0involvement of\u00a0state banks and\u00a06) attract foreign investors.<\/p>\n
It is simply impossible to\u00a0design a\u00a0privatization scheme that achieves all of\u00a0these goals simultaneously.<\/p>\n
Alternately, the\u00a0government could drastically limit the\u00a0involvement of\u00a0state banks. This would likely improve the\u00a0quality of\u00a0management but would significantly depress valuations.<\/p>\n
Unless the\u00a0government significantly changes its stated goals, foreign investors will remain uninterested.<\/p>\n
The\u00a0Russian government needs to\u00a0decide what it values most highly. Does it want to\u00a0involve foreigners or keep everything registered in\u00a0Russia? A\u00a0properly-structured program of\u00a0privatization would marginally boost the\u00a0country’s growth rate and\u00a0bring in\u00a0fresh management, but would require such economic de-regulation that, by\u00a0all accounts, the\u00a0Kremlin deems unacceptable.<\/p>\n
I would expect a\u00a0reprisal of\u00a02009’s performance\u00a0\u2014 self-satisfied talk of\u00a0privatization with very little action. The\u00a0real question is whether oil prices will rebound like they did last time.<\/p>\n
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Mark Adomanis writes: \u00a0You know that Russia is in\u00a0real trouble when liberal economic policies start getting batted around. This is particularly true of\u00a0“privatization,” a\u00a0typically boring and\u00a0technical term studiously avoided during periods of\u00a0stability and\u00a0then suddenly thrust back into\u00a0the public consciousness during … Continue reading