Dozens of Russian companies are becoming state-owned. What are the pros and cons? Photo: Alexander ShPAKOVSKY/Midjourney
Dozens of Russian companies are becoming state-owned. At the same time, the authorities are reporting how many billions the country has earned from the privatization of state assets. How does one fit in with the other and what can we expect?
100 COMPANIES RETURNED
“I would like to immediately summarise the position here: there is no talk and there cannot be any de-privatisation or nationalisation of the economy,” the Russian President made this statement this spring at the meeting of the Prosecutor General’s Office. Last year, at the Eastern Economic Forum, there was also a discussion about whether “de-privatisation” (this delicate term has recently been used instead of the frightening “nationalisation”) has already begun in the country or not yet.
Why are we even talking about nationalizing the economy? – you ask. After all, no one seems to have abolished the “free market” in Russia yet. But, as we know, there is no smoke without fire. These are the figures announced by Russian Prosecutor General Igor Krasnov at the St. Petersburg Economic Forum: since 2022, more than 100 companies, whose assets are estimated at 1.3 trillion rubles, have been returned to the state based on the claims of prosecutors and subsequent decisions of Russian courts.
Since the beginning of last year, according to the Prosecutor General, 20 strategically important enterprises illegally seized from the ownership of the Russian Federation have become state property. This would seem to be good news. But private capital is scared. And the deprivatization of dozens of companies at least alarms potential investors.
“We see a large number of claims from the prosecutor’s office regarding historical transactions, where, in fact, both the statute of limitations and the statute of limitations for acquisitions have long since passed,” expresses concern, said Sberbank head German Gref.
The fact is that the prosecution has recently increasingly questioned the legality of the privatisation of a particular company carried out at the same time, even if it happened 30 years ago. And on this basis, through the court, it demands that the asset be returned to state ownership. And although the company may have had other owners for a long time, the courts, as a rule, side with the prosecution.
RETURN TO THE STATE AND SELL AGAIN
The state does not always retain confiscated property. After all, the state already occupies a very significant part of the Russian economy: according to experts from the Russian Academy of National Economy, the public sector accounts for about 60% of Russian GDP. That is why the Ministry of Finance and the Central Bank periodically initiate discussions on the need for new privatization, which would allow the state to replenish the budget.
By the way, there are not many purely state-owned companies in the country. For example, in Russian Railways and Transneft the state (through the Federal Property Management Agency) owns 100% of the shares. But there are many companies that the state partially owns or controls through its structures. And now there are about 700 of them, including Gazprom, VTB, Sberbank, Rosneftegaz, Aeroflot and many others.
However, the public sector is gradually expanding. Over the past 20 years, its share in the economy has almost doubled (data from the Institute of Applied Economic Research of the Russian Academy of National Economy and Public Administration). Is this good or bad?
According to Georgiy Ostapkovich, director of the Center for Market Research at the Higher School of Economics, from the point of view of economic theory, privatization is now necessary, as it eases the burden on the federal budget. After all, then it will not be the state, but private owners, who will bear the burden of investment, development and technological re-equipment of enterprises.
Moreover, the efficiency of the state in managing companies is often lower than that of private owners; there is plenty of evidence of this fact (see “Point by Point”). The country’s leaders also understand this.
Deputy Head of the Presidential Administration Maxim Oreshkin at the Eastern Economic Forum in the fall of 2023 (at that time Oreshkin held the post of Assistant to the President on Economic Issues) admitted that the state, represented by officials, “is not a very good owner.” According to him, private owners have a greater motivation to make the enterprise highly profitable, to earn more and have the opportunity to develop and invest in new projects.
But what to do with the growing number of nationalised companies? The Russian government has an answer to this question. According to Finance Minister Anton Siluanov, the authorities have no intention of managing the nationalised companies. The assets transferred to the state by court decisions will be sold to new owners. Siluanov said this during the St. Petersburg Economic Forum. “The state does not plan to keep or manage the assets transferred to the state revenue (in particular, we are talking about the property of the country’s largest pasta producer, Makfa. – Ed.) – they will all be sold. We do not need such a state-owned economy,” the minister said.
The shares of Far Eastern Shipping Company were converted into state revenue by the court, but were not transferred to private owners: they were transferred to the state corporation Rosatom. Photo: Vitaly ANKOV/RIA Novosti
ILLUSTRATIVE EXAMPLES
Below are some examples of how the fate of recently nationalised companies is shaping up.
In 2022-2023, the assets controlled by former State Duma deputy Sergei Sopchuk were confiscated in favor of the state. These include the gold mining company Terney Zoloto, the largest tourist facility in Primorye, Mayak Recreation Complex LLC, as well as Poltava Terminal LLC and Nizhneleninskoye River Checkpoint LLC – border crossings on the border with China. And although the official owners of these LLCs were other people (among whom were close relatives of the ex-deputy), investigators insisted that Sopchuk himself received income from the shares, which means that he concealed real income.
In the end, the Primorsky oligarch left Russia (he was put on the international wanted list) and the Zamoskvoretsky court nationalized his assets. Mayak was transferred to the All-Russian Children’s Center “Ocean”, and the new owner of Terney Gold for 1.2 billion rubles became a private owner – LLC “Honeyed”.
New private owners were quickly found for other nationalized enterprises. For example, the “Pamashyalsky stone quarry” confiscated from the former head of Mari El Leonid Markelov (this property was recognized by the court as illegally acquired during his civil service) was transferred from state jurisdiction to the control of businessman Alexander Mikhailov.
The Bronka deepwater port in St. Petersburg, nationalized after a court found that the facility was built with funds obtained as a result of corruption schemes, has been transferred to the NKK-Logistic company for 10.9 billion rubles.
New owners of nationalized enterprises are not always found through open tenders. The Bronka port, for example, received owners by government order, and the shares of the Solikamsk magnesium plant and the Far Eastern Shipping Company, converted into state revenue, were transferred to the state corporation Rosatom in accordance with a special presidential decree.
On the other hand, actions by the prosecutor’s office and the courts to establish “historical justice” – when assets illegally privatised decades ago return to state ownership – can also have the opposite effect: they infringe on the legal rights of bona fide buyers. As was the case in April, when the Arbitration Court of the Perm Territory accepted the prosecutor’s demand to seize shares in the Solikamsk Magnesium Plant (SMZ) in favour of the state. The court ruled that the privatisation of SMZ many years ago was carried out illegally, but now not only the four main shareholders, but also more than two thousand minority shareholders – respectable investors who own small blocks of shares – may lose their shares.
It got to the point that the Central Bank challenged this decision and filed an appeal. According to the Central Bank President Elvira Nabiullina, protecting the rights of investors and bona fide share buyers is “the cornerstone of investor confidence in the financial market.” At the same time, the country needs funds now and privatization is one of the important sources of financing the budget deficit.
HUGE PLANS
It is therefore quite logical that the Ministry of Finance is advocating the partial transfer to private hands of companies with a state shareholding of more than 50%. The agency even sent the government a list of 30 companies (whose names are not published) whose shares can be sold to private individuals. But in such a way that the state does not lose its controlling stake.
According to Minister Anton Siluanov, this could bring hundreds of billions of rubles to the budget. Indeed, in 2023, for example, the plan for privatization of federal property was exceeded 16 times and the budget received about 29 billion rubles from privatization instead of the planned 1.8 billion. The plan for 2024 was 1.2 billion. In the first half of the year, revenues from privatization exceeded 11 billion rubles.
Thus, it seems that large-scale privatization is proceeding in parallel with de-privatization, without interfering with it at all, but, on the contrary, helping it: such is the Russian paradox.
One of the most high-profile cases of deprivatization occurred last spring: the country’s largest pasta producer, Makfa, was transferred to the state. And so far the state is in no hurry to part with the new ownership. Photo: Donat SOROKIN/TASS
SPECIFICALLY
Which companies were transferred to the state?
Over the past two and a half years, the state has gained control over the assets of many Western companies that have severed ties with Russia. These include AvtoVAZ, Russian Nissan and Shell factories, etc. Now under threat of nationalization are large companies, about whose owners law enforcement officials have already raised questions in recent years, as well as those companies whose owners have left the country. That is why the term “patriotic deprivatization” even appeared. Here are just some of the companies whose shares were transferred to the state in recent years:
Norwegian oil and gas company Equinor
French oil and gas company TotalEnergies
“Bashkir Soft Drinks Company”
LLC “Phoenix”, which managed the port “Bronka”
“Kuchuksulfate”
Metafrax Chemicals (produces methanol)
Kaliningrad sea trading port
“Syasky Pulp and Paper Mill”
OJSC “Uralbiopharm”
Agroholding “Pokrovsky”
JSC “Makfa”
QUESTION – RIB
Who manages more effectively?
If we talk specifically about the Russian market, then such data do exist. Financial analyst Valery Emelyanov analysed the growth of share prices of public and private companies over 11 years and came to the conclusion that an investor should definitely make his long-term choice in favour of private traders, whose profitability over this period on average turned out to be several times higher than in the public sector: 181% versus 54%.
“The question of state participation in the economy is, of course, dialectical: different opinions can be heard here,” Georgiy Ostapkovich, director of the Market Research Center at the Higher School of Economics, shared his opinion with KP. – But many years of world practice have shown that private ownership is always more effective.
This is confirmed by official statistics. For example, according to Rosstat, in the difficult economic year 2022, state-owned enterprises earned 52% less than the previous year. And the profits of private owners fell by only 12.6% over the same period.
Here are the other numbers. According to the authors of a study on the efficiency of state-owned enterprises, published in the Central Bank’s “Finance and Credit” magazine, “labour productivity in state-owned enterprises is 75% lower than in private ones in terms of revenue per year.” employed.”
However, experts are confident that state involvement in a number of industries will remain high. Some companies may remain in the public sector for strategic reasons – for example, companies in the military-industrial complex or the space sector.
“Individual defence industry enterprises can be state-owned,” says Georgy Ostapkovich. – In addition, the state should retain natural monopolies, such as Russian Railways, where the division into separate private companies can lead to the breakdown of complex transport chains.
