Would You Buy a Used Car from Vladimir Putin?
By Paul Gregory
Exclusive to La Russophobe
The Russian government announced last week it is selling shares of eleven state-owned companies to new shareholders. The companies include the national railroad, two state banks, a state oil company (Rosneft), and the state oil pipeline company (Transneft).
Proceeds from the sale are to be applied against the state budget deficit. In all cases, the government will retain majority ownership. Although there may be strategic investors, purchasers will clearly be minority shareholders. Notably, the announcement coincided with Conoco’s withdrawal from Russia after its billion dollar investments in the Russian oil industry soured.
Although most major investors in Russia have seen their investments collapse after confrontations with tax authorities, environmental agencies, Russian courts, and Kremlin-favored oligarchs, buyers of shares in these eleven Russian companies are supposed to be protected. After all, minority shareholders now have the state on their side. Buyers should, however, beware for three reasons!
1) None of these companies have ever been subject to a real audit that spells out the true ownership structure and the web of related party transactions. Russian companies, such as these, cannot afford to make such disclosures because they would reveal the intricate web of corruption on which they are based.
2) These companies are run in the interest of the Russian state, not in the interest of shareholders. Whereas non-government shareholders want to see long-run profit maximization, the Russian state wants these companies to serve as instruments of Russian state power. The two goals inevitably conflict.
3) There are no real protections of the rights of minority shareholders in the absence of a true rule of law. There are no guarantees that decisions will not be taken against minority shareholder interests, and there is no one to stand up for their rights.
The fact that Russian corporations are corrupt and poorly run is seen by the discounts at which they sell. Gazprom, the Russian natural gas and oil giant, should be worth many times that of Exxon-Mobil based on its pipelines and reserves; yet it sells at a small fraction. Buyers of these eleven companies must consider whether their shares are being offered at a sufficient discount to compensate for the corruption, huge risks, and state intervention. The investment will pay off in the long run only in the unlikely event of the establishment of a true rule of law in Russia.