Bloomberg News

Russia May Sell Rosneft as Medvedev Urges More Privatization

June 17, 2011

(Updates with possible Rosneft sale from first paragraph. See EXT3 <GO> for more on the St. Petersburg conference.))

June 17 (Bloomberg) -- Russia said it may surrender state control of its largest oil producer as President Dmitry Medvedev urged a bigger privatization program to lure investors and speed up the lowest rate of growth among major emerging economies.

“The dominance of state-controlled companies in a considerable number of industries” is limiting enterprise and investment and threatens to make Russia less competitive, Medvedev said today at the St. Petersburg International Economic Forum. “This economic model is dangerous for the future.”

The government may cut its stake in OAO Rosneft, which produces almost a quarter of Russian oil, to below 50 percent, Arkady Dvorkovich, Medvedev’s economic adviser, said. Russia may also sell its entire shareholding in the second-largest bank, VTB Group, in three to five years, he told Bloomberg News.

Medvedev, 45, a former corporate lawyer, has pledged to fight corruption and reduce the state’s role in the economy to attract foreign investment and reduce Russia’s reliance on energy exports. While he’s seeking a second term as president, Prime Minister Vladimir Putin, who picked Medvedev as his successor in 2008, hasn’t ruled out a return to the Kremlin in 2012 elections.

The government plans to raise at least 1 trillion rubles ($36 billion) by selling state assets over the next three years. Medvedev today ordered the privatization plans to be revised by Aug. 1, saying they are “too modest.”

Blocking Stakes

The state should give up majority stakes and in some cases blocking stakes of more than 25 percent in the main state-owned enterprises, Medvedev said. State control may still be necessary for companies that have monopoly infrastructure and are essential to the nation’s security, he added.

“We had a stage of development tied with strengthening the role of state in economy. Now the potential of this way is exhausted.” Medvedev said. “We aren’t building state capitalism,” and private business should play the biggest role in the economy, he added.

Medvedev is trying to combat Russia’s reputation as the world’s most corrupt major economy amid investor uncertainty about the future of his ruling tandem with Putin. Citigroup Inc.’s Vikram Pandit, Bank of America Corp.’s Brian T. Moynihan, Blackstone Group’s Stephen Schwarzman and Deutsche Bank AG’s Josef Ackermann are among the business leaders at St. Petersburg for the annual economic forum.

‘More Evidence’

“This is more evidence that the government is determined to transfer state companies into private hands,” Roland Nash, chief investment strategist at Verno Capital, a Moscow hedge fund that manages about $140 million, said in an interview in St. Petersburg. “It’s got to be positive.”

Russia seeks to boost proceeds from asset sales by 50 percent to 450 billion rubles next year and expects to collect at least the same amount annually in 2013 and 2014, Dvorkovich told reporters. Under Putin’s presidency from 2000 to 2008, the government increased state ownership in strategic industries, including oil and gas.

Rosneft controls most of the former assets of Yukos Oil Co., once Russia’s biggest oil company, which was declared bankrupt and sold in pieces after facing $30 billion of tax claims during Putin’s presidency. Former Yukos owner Mikhail Khodorkovsky was convicted of fraud and tax evasion in 2005 and oil embezzlement in December 2010, pushing his sentence to 13 years.

Putin Allies

Medvedev earlier this year ordered eight Cabinet members, including several Putin allies, to surrender by July 1 their positions on the boards of state companies they regulate. Deputy Prime Minister Igor Sechin stepped down as chairman of Rosneft in April.

Putin and his supporters favor the status quo over modernization, and this makes it impossible to accelerate economic growth to the level of competing emerging market powers, Igor Yurgens, a Medvedev adviser, said yesterday in an interview at the St. Petersburg forum.

Russia’s economy expanded 4.1 percent from a year earlier in the first quarter, compared with 9.7 percent growth in China and 7.8 percent in India. Medvedev said in a January interview at the World Economic Forum in Davos, Switzerland, that Russia sought to boost growth to 8 percent to 10 percent within five years.

‘Take it Easy’

“That’s the stability party for you, those who say take it easy, don’t go out of your way because we are OK with our 4 percent growth in GDP,” Yurgens told Bloomberg Television. “We have to do some bold steps forward in privatization.”

Russia sold 10 percent of VTB in February and has picked advisers for sales of minority stakes in the largest lender, OAO Sberbank, and OAO Sovcomflot, the biggest Russian shipper.

Holdings in Sovcomflot, Sberbank, OAO Novorossiysk Commercial Sea Port and Murmansk Commercial Seaport are slated to be sold this year, Alexei Uvarov, head of the economy ministry’s property department, said on May 4. The government expects to offer stakes in OAO RusHydro, VTB Group and Federal Grid Co. next year before proceeding with the sale of Rosneft, OAO Russian Railways and Russian Agricultural Bank in 2013.

The Sovcomflot sale may be postponed until next year, First Deputy Prime Minister Igor Shuvalov said yesterday.

--With assistance from Scott Rose, Denis Maternovsky and Jason Corcoran in St. Petersburg. Editors: Hellmuth Tromm, Willy Morris.

To contact the reporters on this story: Lyubov Pronina in St. Petersburg at lpronina@bloomberg.net; Henry Meyer in St. Petersburg at hmeyer4@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net.


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