A Russian Fire-Sale Privatization?

PARIS – Squeezed by low oil prices and Western sanctions, Russia’s fiscal position is crumbling fast, forcing the government to take increasingly drastic measures to contain the budget deficit’s growth. Government spending has already been cut 8% in real terms this year, relative to 2015 – large, but not nearly enough to balance the budget. Indeed, if the oil price remains in the current range of $30-35 per barrel (this year’s budget assumes an average of $50), Russia’s deficit will be around 6% of GDP. With a rainy day “reserve fund” of only 4.5% of GDP and scant access to international financial markets, Russia urgently needs a fiscal Plan B.

The good news is that Russia’s government now seems to recognize this. In January, the authorities announced additional cuts amounting to about 1% of GDP. More important, the government will try to raise another 1.5% of GDP – one trillion rubles ($13 billion) – by privatizing state-owned firms, including “crown jewels” such as Rosneft (Russia’s largest oil company), the diamond monopoly Alrosa, and the flagship airline Aeroflot.

To be sure, President Vladimir Putin has outlined some important constraints on these potential sales: the government will not sell majority stakes; the deals cannot be financed by loans from state-owned banks; and the buyers cannot be registered outside of Russia’s jurisdiction. Nonetheless, this privatization plan could be an important step toward reining in excessive state ownership in Russia, where the government controls the commanding heights of the economy in energy, mining, manufacturing, electricity generation, financial services, and transportation.

Russia has talked about a new round of privatization before. During his presidency, Dmitri Medvedev pledged to reverse the mid-2000s expansion of state-owned companies and privatize all “non-strategic” firms. Medvedev’s successor (and predecessor) Putin reiterated these promises in 2012. On the first day of his second stint as President, Putin signed a decree “On the long-term state economic policy” that stipulated full privatization of all state assets – except natural monopolies, natural resources, and defense assets – before 2016.