The panel discussion focused on the interim results of Russia's privatization process. While most panelists agreed that privatization was necessary to reduce the state's role in the economy and increase private sector involvement, some issues around the process needed to be addressed. Specifically, it was unclear whether the main goal was to finance budget deficits or implement structural reforms. Additionally, the panel discussed strategies for privatization, including selling assets in small blocks or through share swaps and convertible bonds. The role of private equity funds and stock exchanges in the privatization process was also highlighted.

1. 03.02.2012
Privatization: Interim Results
The panel included all the parties engaged in the process: CEOs of state companies,
government officials, investment bankers, private equity investors and fund managers.
The key outcome of the discussion was that privatization is good and necessary for
Russia. But some internal contradictions and internal conflicts in the process need to
be cleared up.
First, is privatization aimed at financing the budget deficit, or is it merely a
political decision designed to bring in structural reforms? The majority of panelists
said that the latter was more important. Privatization is necessary to reduce the state’s
role in the economy, shrink the public sector and increase the role of the private
sector.
Aleksei Uvarov said it is not only important to privatize large state holdings, but also
to spin off related entities from state holdings to reduce the size of the public sector.
Slava Pivovarov recalled research by McKinsey that labelled privatization as “low
hanging fruit” to achieve growth. Kirill Dmitriev said that promoting competition was
important, and privatization could help achieve that. Alexei Kalinin mentioned the
importance of privatization for growth of the market in breadth and in depth. Nikolai
Shvets said that as the head of a state company, he needs to see the rules for the
development of a particular sector made before privatization is carried out, while he
praised the state as the most effective owner of assets. Ruben Aganbegian pointed out
that fiscal goals and structural reform are actually at loggerheads.
The moderator summarized the remarks by saying that everyone apparently agreed
that privatization is good, but the prevailing thought was that nothing would happen
until the budget comes under pressure.
The panelists then discussed a number of technical issues. It turns out that the
legislation has been changed so that the state can now privatize assets without the
need to create a special fund.
Privatization deals from last year were mentioned: VTB and Freight One, as well
as the failed Sovcomflot deal. There was also a mention of upcoming deals, such as
United Grain Company, a block in Apatit and the sale of SG Trans.
There was suggestion that privatization should occur in small blocks, with a
gradual increase in the free float. Private equity deals can also be conducted in the
same manner as pre-IPO deals.
The discussion moved on to the question of whether privatization deals should
involve new shares and new equity deals to finance company development, or
simple divesture from the state. The moderator mentioned that there is a dichotomy
between the goal of structural reform via privatization and the government’s
paternalistic approach and hope that it can be successful in tackling corporate finance
issues at the privatized companies.
It was mentioned that there are other ways to privatize, such as through share
swaps or issuing convertible bonds, as Blackstone did in autumn 2011.

2. The role of private equity funds was discussed. Dmitriev said that he would be
interested in buying some assets, particularly agricultural, banking and logistics and
transportation assets. Kalinin sees the main role for private equity firms as “sherpas”,
taking stakes pre-IPO or intermediating further sales of these assets to investors.
The role of exchanges in privatization was also highlighted, including the need to
conduct privatization deals on MICEX. There was a reference to the Brazilian
experience, where Novo Mercado, the exchange that set the listing rules,
revolutionized corporate governance for companies trading on the exchange and ran
well ahead of the legislative process. There was also mention of two OECD models
for the treatment of minority investors: the “conventional majority model” and the
“majority model based on a 3% threshold”.
The conversation touched on what requirements buyers must meet.
There was also a brief mention of the opportunities for Russian private and state
pension funds in privatizations.
There was a discussion of dividends from companies up for privatization. Gleb
Nikitin and Uvarov take dividend policies of state companies very seriously as a way
to improve corporate governance and said there was a great deal of discussions on the
issue.
Pivovarov indicated that two types of dividends are possible: special dividends
distributing cash before a sale, and regular dividends, which are a part of a normal
corporate governance and dividend policy and should be generous for state companies
with strong cash flows.
Panel
Said Batkibekov – Managing Director Parastatal Projects Group, Sberbank of Russia
Ruben Aganbegyan – President, CEO, MICEX-RTS
Kirill Dmitriev – Chief Executive Officer, Russian Direct Investment Fund
Alexei Kalinin – Senior Partner, Baring Vostok Capital Partners
Gleb Nikitin – Acting Head, The Federal Agency for State Property Management
Vyacheslav Pivovarov – Managing partner, Altera Capital
Nikolay Shvets – Director General, JSC IDGC Holding
Aleksei Uvarov – Head of The Property Relations Department, Ministry of Economic
Development of The Russian Federation
Source: Troika Dialog