Analysts Skeptical of Measures to Save Budget

Moves to salvage the Russian federal budget by selling off state assets to raise an emergency 30 trillion rubles ($5.2 billion) will create opportunities for foreign investors on the market, but history suggests the effort may fall short of government needs, analysts said Thursday.


First Deputy Prime Minister Anatoly Chubais told the upper house of parliament Thursday that the government will seek to raise 30 trillion rubles through "new approaches to the precious metals market, equities market, the alcohol monopoly and highly efficient privatization projects."


Although Chubais gave no details, analysts said the announcement may signal that the government is resigned to selling interests in its most prized possessions.


"It could mean they're feeling squeezed to the point where they have to open up some other sectors that they were trying to keep in the treasure chest," said Coast Sullenger, head of sales at Pioneer Securities.


Efforts to raise funds through privatization, however, have come up way short of targets in the past, with last year's state sell-offs raising only about 5 percent of a budgeted 12 trillion rubles.


As for unloading precious metals to raise money, analysts said that would likely to drive prices down, and Russia's reserves of some minerals are reportedly running low.


"If you look at the track record of Russia in terms of raising money from privatization it hasn't been very good ... alcohol and precious metals are even harder," said Danielle Downing, emerging markets strategist for Salomon Brothers investment bank in London. "I don't think they'll be successful."


James Fenkner, head of research at Centreinvest Securities, said the only way the government can raise substantial funds is by allowing international investors to bid for valuable state holdings.


The State Property Committee last week upped its target for privatization revenue this year from 6.5 trillion rubles to 10 trillion rubles. The marquee offering is a large block in the Svyazinvest telecoms holding company, expected to raise more than $1 billion. Stakes in Rosneft oil, the insurer Rosgosstrakh and the utility Unified Energy Systems are also on the block, but little else has been spelled out.


Earlier sell-offs, such as 1995's loans-for-shares program, were widely seen as rigged at bargain prices in favor of insider Russian banks.


"If [Chubais] is truly serious about maximizing revenue, they'd open up the auctions to foreigners," Fenkner said. "These stakes would be priced much higher if they were sold competitively." He cited KomiTEK and Tyumen Oil as the types of companies attractive to buyers.


Although flooding the market with state-held stock could drive down prices by massively increasing supply, Fenkner pointed out that liquidity in second-tier stocks such as oil-holding companies is sufficiently low to avoid tanking the market.


Peter Halloran, director of equities at CS First Boston, said the government could boost returns for investors and itself on the equities market by improving stock-market infrastructure, thereby generating greater liquidity and more revenues from privatization.


He said it is realistic to raise substantially more money from sell-offs since last year's target fell so far short, adding that auctions will "almost certainly" be open to foreigners.


"There's plenty left aside from the large" companies to privatize, he said. "There's healthy appetite."


But even if the government departs from the practice of rewarding domestic friends with discount share blocks, expanded privatization could face opposition in the State Duma, which is especially hostile to the notion of valuable Russian property falling into foreign hands.


Nationalist and communist deputies have prepared a draft bill calling for renationalization of "strategic" state properties, bankrupt enterprises, or monopolies where "foreign or criminal capital with money of unknown origin" have acquired a controlling interest, Interfax reported Thursday.


Compensation, if granted, would be made through the issue of government securities redeemable 10 to 20 years after nationalization, according to the bill.


The government's desperate need for cash also could rebound on the domestic treasury bill market, where yields have been rising in recent weeks as the Finance Ministry has stepped up borrowing to pay wages.


Although the cash crunch has been no secret, "It hits home a little bit harder when people come out with these sort of comments," Sullenger said of Chubais' remarks.


Palladium and platinum prices seesawed Thursday on the heels of Chubais' comments, Reuters reported.