Oct. 8 (Bloomberg) -- Russia's economic decline is forcing the country to walk the walk after more than a decade of talk about dragging the largest energy exporter away from its oil dependency and reducing the footprint of the state.
"There is a genuine reform agenda, but it has been advanced because of economic necessity," said Tom Mundy, a strategist at Renaissance Capital in Moscow. "We should welcome it; it brings transparency, it brings liquidity, it brings foreign investors back. But I think it's something that is a result of the financial crisis."
Prime Minister Vladimir Putin wants to use state asset sales to help plug next year's budget deficit, which his government estimates at 6.8 percent of output, and use the privatization push to modernize derelict infrastructure. Last year's 54 percent slump in oil prices, which pushed the economy into a 10.9 percent contraction in the second quarter, has forced the government to revive its commitment to renouncing its commodity reliance.
"The shock of the oil price collapse destroyed" Russia's complacency, and "the government has a renewed desire to advance a more radical reform program," Troika Dialog, the country's oldest investment bank, said in a note.
Crude oil for November delivery climbed 2.8 percent to $71.51 a barrel at 19.22 p.m. in Moscow. Crude dropped more than $100 a barrel between July last year and March. The ruble gained 0.8 percent against the dollar to 29.5498, its strongest close since Dec. 30.
River, Sea, Air
"We view privatization as one of the key instruments for structural reform in the real sector of the economy, improving competition and attracting investments," Putin told a cabinet meeting on Oct. 6. The crisis had lead to a "serious increase" of the state's presence in the economy, he said.
Russia wants to generate 70 billion rubles ($2.4 billion) next year, 10 times the original target, by selling all or part of state stakes in 450 enterprises, Economy Minister Elvira Nabiullina said at the meeting. Sales will consist mainly of airports and river and sea terminals.
First Deputy Prime Minister Igor Shuvalov said on Sept. 22 the government may offer as much as 20 percent of OAO Sovcomflot, the shipper that merged with OAO Novoship in 2007.
Next year's sales won't include OAO Rosneft, which has 15 percent of shares freely traded, OAO Sberbank, the biggest lender, or rail monopoly OAO Russian Railways.
Rise of Oligarchs
This isn't the first time Russia is selling assets. In the 1990s some of the biggest companies were auctioned to hand- picked businessmen, later to become oligarchs, at knockdown prices after a so-called loans-for-shares plan to prop up late President Boris Yeltsin's government.
Putin, who was president between 2000 and 2008, oversaw the expansion of state domination in the oil industry and created holding companies in the aerospace, shipbuilding and nanotechnology sectors.
Russia's last major asset sale was in 2007, when VTB Group, the second-largest bank, raised $8 billion in the biggest initial offering of the year. Rosneft's IPO a year earlier raised $10.6 billion.
The government has about 5,500 enterprises that can be converted into joint stock companies and sold starting as early as this year, Shuvalov said on Sept. 21.
State Ownership
State corporate ownership stood at 45 percent at the start of the year, according to a February report by the Moscow-based Institute of Contemporary Development.
Putin, who stewarded eight years of unprecedented economic growth as president, said on Sept. 29 the government will continue its modernization course unhindered by fiscal or political developments.
"There will be no return to the past," Putin told investors in Moscow. "Russia will remain a liberal market economy."
President Dmitry Medvedev, in his "Go Russia" open letter of Sept. 10, said the country's raw-material reliance is "humiliating" and "primitive," adding that "achieving leadership by relying on oil and gas markets is impossible."
While political leaders declare their determination to change course, some economists remain skeptical about how wedded the government will be to its diversification push if energy prices recover.
Oil Revenues
"Oil revenues will dictate the pace of this program," said Chris Weafer, chief strategist at UralSib in Moscow.
Russia's 2010 budget is based on an average oil price of $58 a barrel, rising to $59 in 2011 and $60 in 2012. Crude oil was at $69.86 a barrel yesterday. Energy export prices could be higher than the government forecasts, Putin said on Sept. 18.
Medvedev, who until 2008 chaired gas monopoly OAO Gazprom, said last week a fair price for oil is between $80 and $90 a barrel, Kommersant reported.
"If the oil price improves and the budget deficit declines, then the incentive to push these reforms quickly will be mitigated," Mundy said. "But you would need a sustained high oil price for a long time for this to be pushed on to the back burner again."
The plan has two stages, with the first next year designed to generate funds to reduce Russia's first deficit since its 1998 default, according to a Sept. 30 Economist Intelligence Unit report. The second stage, lasting several years, will target industries where private ownership will improve efficiency.
Market Demand
That allows the state to adjust the pace to market demand.
"The state intends to test the water with these smaller lots," Weafer said. "If they are successful and the appetite is good, they will follow it through with a more substantive divestment program in 2011."
Russia will only "conduct these sales if the market is favorable and we will receive the revenue we are counting on," Nabiullina said. "We won't sell cheaply."
"This is a government with long time horizons and a very strong balance sheet," said Rory MacFarquhar at Goldman Sachs Group Inc. in an e-mail. "Russia can afford to wait for better valuations."
By Alex Nicholson