A surprise delay to Russia's privatization of mid-sized oil producer Bashneft does not bode well for plans to sell a stake in energy giant Rosneft this year. A failure of that deal too would deal a heavy blow to state finances.
Moscow needs privatization revenue to help meet its targets for a 2016 budget based on optimistic oil price projections. The alternatives are problematic: a sovereign wealth fund is already dwindling, domestic borrowing costs remain high and the Bashneft episode is unlikely to impress potential foreign lenders.
Amid signs of feuding among powerful businessmen and officials, the government postponed Bashneft's privatization this week, saying that selling a 19.5% stake in Rosneft, the country's largest oil producer, was now the priority.
The reaction was negative. "We do not understand the reasons for the delay, but we would like to emphasize that a cancellation of the deal at the last minute does not have the best impact on Russia's investment climate," economists at Aton investment house wrote in a note.
This year's budget assumes that a Rosneft sale will raise about 700 billion roubles (US$11 billion). But there is a risk it might not happen, given that anxiety about relinquishing state control over strategic assets--and the interests of oligarchs--often win over prudent fiscal measures in Russia.
Earlier this month, Economy Minister Alexei Ulyukayev warned that there may not be enough time to prepare Rosneft's privatization this year. A government source said on Aug. 18 that the risk of shelving it until next year still exists.
The government said on Aug. 17 that the Bashneft sale might still take place this year. But without the Rosneft revenue, and the roughly-300 billion roubles that could come from Bashneft, the state could struggle to keep the budget deficit to its target of 3%of GDP.
"If Rosneft gets delayed to 2017 then it's a big negative," Oleg Kouzmin, a Russia economist at Renaissance Capital, said.
Higher Spending, Fewer Options
This year's budget assumes an oil price of $50 a barrel (bbl), but world prices have been below this level for most of the time since January. A Bashneft sale, while not included in the budget, would have helped to plug the gap.
The same would be the case with sales of stakes in Russia's second-largest bank, VTB, and diamond miner Alrosa. So far, only the Alrosa sale has happened, bringing in about US$814 million.
The lost revenue from Bashneft could be somewhat offset by higher dividend payouts from state-controlled companies.
The business daily Vedomosti reported government officials have been talking about enforcing an interim dividend payout from several companies, such as Russian Railways, pipeline operator Transneft and shipping line Sovcomflot. But that would bring in only about 21 billion roubles, Vedomosti said.
At the same time, the government may have to fund a possible rise in pensions before parliamentary elections in the autumn, putting a strain on the budget This increase to compensate for high inflation, which would be the second this year, would be made through a one-time payment of 137 billion roubles.
"We view it as a litmus test for previous cabinet calls for a tighter budget," said Natalia Orlova at Alfa Bank.
Russia can also raise borrowing, but that might be tricky as yields on 10-year rouble treasury bonds are around 8.3%.
"It's difficult to increase domestic borrowing so rapidly, and there is an understanding that maybe yields are still a little bit high for them to borrow in greater amounts," Kouzmin said.
The Bashneft postponement and uncertainty over the Rosneft sale substantially increase the chances of more foreign borrowing this year, the source in the government told Reuters.
Konstantin Vyshkovsky, head of the finance ministry's debt department, told Reuters it would decide in the autumn whether to top up a sovereign Eurobond issue with the remaining US$1.25 billion that could be raised.
Russia issued the US$1.75 billion 10-year bond in May without the participation of any international settlement banks. Their absence was widely seen as the result of Western financial sanctions linked to the Ukraine crisis.
But in July, Euroclear, one of the world's largest settlement banks, started serving the Eurobond, potentially clearing the path for a further placement.
Western investors may still be wary of participating as they were earlier this year, this time deterred in part by the Bashneft slippage.
Even if foreign investors join the party, they will not lend enough for Russia to meet its deficit target. The finance ministry might therefore be forced to dip deeper into the Reserve Fund, one of two sovereign wealth funds that have collected windfall oil revenues when prices were high.
According to a finance ministry proposal seen last month by Reuters, 980 billion roubles (US$15.4 billion) was to be left in the Reserve Fund by the end of this year, before dwindling to zero at an unspecified point in 2017. But the government source said that without cash from Bashneft and possibly Rosneft too, the fund may be exhausted "much sooner."
Maksim Oreshkin, a deputy finance minister, warned earlier this month that without a Rosneft sale this year, the ministry might be forced to spend 3 trillion roubles from the fund in 2016, not 2.3 trillion roubles as earlier planned.
Higher prices for oil, Russia's chief export, might help significantly if their recent revival to around $50/bbl lasts. Kouzmin noted that according to the finance ministry's budget proposal for the next three years, an average oil price is assumed at only $40/bbl.
The Finance Ministry would not comment. The ministry is due to propose 2016 budget amendments and changes to the 2017-2019 budget by November. (US$1 = 63.6480 roubles)
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