Russia has announced the largest privatization program since the post-communist sales of the early 1990s.  The wide-ranging privatization plan is intended to raise more than $20 billion worth of shares in state companies during the next three years.  But the state is not looking to relinquish control and will retain key stakes, only releasing up to 25 percent of shares in the national oil company, the national shipping company, two state banks and an electric power management company. 

Russia is entering an election cycle next year with a growing budget deficit.  Reluctant to raise taxes or cut social benefits before elections, the Kremlin chose to sell state property.  Russia has nearly $500 billion in gold and foreign currency reserves, largely from oil and gas sales.  But the Kremlin is trying to protect this nest egg, fearing energy prices could drop again. 

Last year, Russia's economy shrank by eight percent, the worst performance of its peer group - the so-called BRICs, or Brazil, Russia, India and China.  This year, Russia is to partially recover, growing at four percent.

The chief equity strategist for Aton investment bank, Peter Westin, believes state control of Russia's economy may have hit a high-water mark with the high oil prices of 2008.

"They need to raise money," said Westin.  "They are going to hike some taxes, but privatization was an easy road to take.  On top of that, we do know that, looking at the statements of Medvedev, the president, he has basically stated time and time again for the last year or so that the state has too big of a hand in Russia and he also stated that state ownership is less effective than private ownership."

In a policy reversal, President Dimitri Medvedev also declared a goal of cutting the state portion of the economy from 50 percent today, to 30 percent 10 years from now. 

Foreign investors are wary of Russian state companies, saying their balance sheets are black boxes and their treatment of minority shareholders can be rough.  But Westin, whose bank facilitates foreign investment in Russia, counters that Russian companies selling shares on the London market are requires to open their books and be transparent.

Meanwhile, highlighting the risks of investing in Russia, ConocoPhillips says it will divest its investments in Lukoil, valued at $10 billion.  Lukoil was Russia's largest private oil company in 2004, when ConocoPhillips first made its investment.

The chief strategist with the Uralsib Financial group in Moscow, Chris Weafer, said ConocoPhillips, the largest American investor in Russia, should have partnered with a state oil company.

"Conoco found itself at the dance with the wrong partner," said Weafer.  "It is clear that the state oil companies - Rosnef, Gazpromneft - are in a much better position to get the attractive licenses.  The new developments - whether East Siberia, Sakhalin, or even the Arctic if it opens up - the state companies will get these licenses.  So you want to be partnered with a state company."

But Weafer said he did not know of any sales from a more modest $2.3-billion privatization program Russia announced earlier this year.

"We are two thirds of the year over with, and we have not actually seen any progress of that small program as yet," said Weafer.  "So there is always in Russia a difference between what the government say it wants to achieve, and actually what it can achieve."

If sales do not materialize, Finance Minister Alexei Kudrin says he has a fallback plan to cut the number of government employees by 20 percent.

Source: VOANews.com