The Russian government has recently unveiled a plan to sell stakes inseveral major state-owned companies over the next five years to private investors with a goal of raising funds to cover budget deficits and to reduce the state’s presence in the economy. The plan had first surfaced in 2009 and was dubbed the “New Privatization Initiative.” The privatization plan is stilin its early stages and the Russian government is expected to work out the main aspects of the planlater this year.
The Ministry of Finance and the Ministry for Economic Development have compiled an interim list of state-owned companies in which stakes of various sizes will be sold to both domestic and foreign investors. The Russian government intends to maintain controlling stakes of at least 50% plus one share in all of these companies. The companies subject to privatization include Rosneft, Transneft, Rosagroleasing, Sovkomflot, Federal Grid Company, RusHydro, Rosselkhozbank, VTB, Sberbank, United Grain Company, and Rosspirtprom. The Russian government expects to raise an estimated $50 billion between 2011 and 2015 from these sales, which is an increase from a previously announced plan to raise US$29 billion over three years. However, it has been rumored that the asset sale could begin as early as 2010 with the sales of stakes in two major companies, most likely in the transport/infrastructure and financial services sectors (the latter could be the sale of a 10% stake in VTB).
The architects of the New Privatization Initiative intend to benefit from lessons learned during the controversial loan-for-shares privatizations in the mid-1990s, and this is one of the drivers behind recently introduced amendments to the privatization legislation aimed at making the process of privatization more efficient and transparent.
The relevant amendments were made to the Federal Law No. 178-FZ, dated December 21, 2001, “On Privatization of State and Municipal Property” (the “Privatization Law”) by the adoption of the Federal Law No. 106-FZ, dated May 31, 2010, “On the Amendments to the Federal Law, ‘On Privatization of State and Municipal Property’” (the “Privatization Amendments”), which came into force on June 15, 2010.
One of the key new changes introduced by the Privatization Amendments, which has been widely discussed in the legal and business community, is the ability of the Russian government to engage foreign and domestic investment banks to arrange and manage the privatization process on behalf of the Russian government on an asset-by-asset basis. Previously, the Federal Property Agency and, with respect to certain military property, the Ministry of Defense had exclusive authority to handle the privatization of federal property.
The Privatization Amendments contemplate that the Russian government would approve a list of companies eligible to organize the sale of state assets (the “Eligibility List”). The selection by the Russian government of companies from the Eligibility List who would handle each particular sale must be accompanied by the following information:
- a description of the federal property subject to privatization;
- a description of the actions to be undertaken by the company in the context of privatization; and
- the amount and the manner of payment of fees to the company.
The Privatization Amendments make no reference to any criteria for companies on the Eligibility List, nor do they set out procedures for compiling and maintaining the Eligibility List. The Ministry for Economic Development has prepared an internal draft of the Eligibility List for approval by the Russian government, which includes major foreign and domestic investment banks. Based on early indicators, the draft Eligibility List consists of 20 banks, of which nine are Russian banks (including VTB Capital, Troika Dialog, and Renaissance Capital) and 11 are foreign banks (including Credit Suisse, Deutsche Bank, JP Morgan, Morgan Stanley, Goldman Sachs, and Citigroup).
Another significant change introduced by the Privatization Amendments is the ability to conduct privatizations through digital auctions. The details of the digital auction process will be set out in a separate regulation to be adopted by the Russian government. The designated auctioneer of federal property subject to privatization will be able to subcontract its obligations to reputable and experienced companies capable of conducting digital auctions.
The Privatization Amendments have removed the section of the Privatization Law that authorized the Russian government to set prices for federal property subject to privatization. Such prices often fell either well below or well above the market price of the property. Under the new rules, the price of federal property subject to privatization will be determined in accordance with a property valuation method prescribed under existing Russian law, which should provide a more reliable estimate of the fair market value of the property.
Other changes introduced by the Privatization Amendments include the provision of information via the Internet in connection with privatized assets and changes to regulations relating to privatizations carried out via initial public offerings.