Russia plans auction of state assets to raise funds, reduce deficit

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Finance Minister Alexei Kudrin indicated the assets will be sold on the open market.

Under the plan, Kudrin said the deficit will gradually fall to 3.6 percent by the end of 2011, and 3.1 percent in 2012; while sovereign debt – a key tranche of the funding program – is expected to climbing to 16.3 percent of gross domestic product from 11.5 percent currently.

“The proposals are good news at the margin, although the renewed emphasis on privatization primarily reflects the need to reduce government borrowing rather than a marked shift in favor of market friendly policies,” said Neil Shearing, emerging markets economist at Capital Economics in London.

Russia's government will retain controlling stakes in all the companies (the Finance Ministry has suggested a minimum stake of 51%,
whereas the Economy Ministry appears to be pushing for a larger minimum stake of 75%.).

“While comparisons with the botched privatization process of the early 1990s are misplaced, genuine concerns with regard to
implementation remain,” Shearing noted.

There appears to be some conflict between the Finance and Economy ministries over some key facets of the program – including how
foreign investors will be treated, particular with respect to the so-called ‘strategic sectors’, like oil.

Overall, Shearing doesn't regard the privatization plans (as they stand) as all that ambitious, citing that even if the government
manages to raise the full $29-billion, this only represents about 2% of Russian GDP.

“In other words, at best the proposal will only partly reverse the increase in the size of the state over the past five years,” he said. “What’s more, privatization receipts are non-recurring and as such cannot form the basis of a sustainable approach to closing the budget deficit. Accordingly, the government will still be faced with tough choices on public spending, particularly if oil prices suffer renewed falls over the next year, as we expect.”