Getting Privatization Wrong - Rosneft's Bid for Bashneft

FT: State-owned Rosneft bids in Russian oil group 'privatisation' 

Russia has this one wrong on so many levels.  As reported, under Russia’s privatization program, government majority-owned energy giant, Rosneft, is bidding to buy another government-owned company, Bashneft.  This would do little to relieve pressure on Russia’s budget and nothing to improve economic performance.

Privatization was originally proposed by the IMF as a way for Russia to increase economic growth by strengthening the private sector.  Little progress was made.  With the emergence of a budget deficit due to the fall in energy prices and sanctions due to Russia’s annexation of Crimea and invasion of eastern Ukraine, privatization reemerged as one of two means to manage the government budget deficit that spending cuts alone could not solve (the other means is to draw down Russia’s Reserve and Wealth Funds).

While the government may get a few rubles out of this because the change in ownership from one government entity to another is not dollar-for-dollar, the bid by Rosneft is worse news because of what it signals about economic policy.  The sale would serve only to concentrate even more economic control in the hands of one of Putin’s closest associates, Igor Sechin, CEO of Rosneft.  But consolidation is the last thing Russian business needs.  What it needs is a confident, competitive private sector.

Rosneft’s bid signals that Putin is not ready to loosen the government’s grip and that Putin is prepared to compromise on the “understanding that state-owned companies should not participate in the privatization programme.”  Putin spokesperson Peskov’s defense about indirect ownership through holding companies is ludicrous.

It means also that Putin is not ready to support economic reforms proposed by economic council advisor Alexei Kudrin.  Therefore, meaningful reform is unlikely.

As reported separately by The Moscow Times, Kudrin’s proposed economic structural reforms are already under challenge from presidential advisor Andrei Belousov based on an alternative proposal for investment through the government’s budget and central bank support,  which would still leave economic initiative in the government's hands.

Economic policy driven by a small cadre of well-connected and self-interested Putin associates is a losing game, because the first casualty will be the Russian economy.