Re-privatising Russia’s economy

Russia is desperate to put the “R” back in the Brics. Its membership of the elite quartet was questioned last year when its economy shrank 8 per cent, while Brazil’s contraction was barely noticeable and Indian and Chinese output powered ahead. Now Alexei Kudrin, the finance minister, is proposing that Russia should sell minority stakes in 10 state-controlled corporate jewels, including oil company Rosneft, VTB Bank, and the Russian Railways monopoly, totalling perhaps $29 billion. It would be Russia’s gest asset sell-off since the botched loans-for-shares privatisations of the 1990s. The government should embrace it. But this time, it also needs to do it right.

The proposal has many merits. It would raise additional budget revenues – when Russia is dealing with its first bu dget deficits for a decade – which could be used, say, to stimulate underdeveloped small- and medium-sized businesses. Most importantly, while Moscow will surely not cede state control of these companies, the plan at least demonstrates a willingness to loosen its grip. It would start to reverse the increase in the state’s share of the economy that occurred under Vladimir Putin’s presidency. It would increase the pressure on companies to become transparent and answerable to private investors. And it could bring in foreign strategic investors with capital and know-how.

The key, as ever in Russia, will be execution. Future stake sales must not be a repeat of the shady insider deals of the 1990s. There should be no new generation of oligarchs, or inefficient state managers turned into owners. Auctions must be carried out in an open and transparent manner by internationally recognised banks. Foreign investors should be free to participate in a non-discriminatory way. Even if the leadership is committed, Russia’s bureaucracy and vested interests are so entrenched that achieving these goals – within the planned 2011-13 time frame – may yet prove impossible.

Handling the privatisations correctly is, moreover, only a start. Russia still needs to strengthen protection of property rights. Too many foreign groups – from Shell and BP, to portfolio investors such as Prosperity Capital, engaged in a tussle over an aborted buy-out of a power company stake – have found Russia’s legal system inadequate or susceptible to pressure. It is not enough simply to ensure foreign investors can buy assets. They must be sure they can hold on to them – or indeed dispose of them – in an unimpeded way.

(This appeared as an editorial in The Financial Times on July 28.)