Buy Shares of Russian State Companies: This Time We’ll Behave

Russia’s advertising supplement in the New York Times carries an amusing headline: “New Russian Government to Back Privatization Effort.” Apparently the new Russian government wants to sell minority shares in ten state companies, including Sberbank, United Grain, and Novorosiisk Port. The article immediately below it is entitled “Moscow Welcomes Foreign Business.” The red carpet is out for foreign investors, so it seems.

The lead article explains that First Deputy Prime Minister Shuvalov is prepared to go ahead with the sale but that “influential” Deputy Prime Minister Sechin wants to wait until the prices are higher. I think Sechin would have to wait quite a while.

Sechin might be asked why share prices of Russian state companies are so low?  Gazprom, for example, has more reserves than ExxonMobil but sells for a tiny fraction. Why? Everyone knows how corruptly and incompetently Russian state companies are run. Gazprom is among the worst. Now the new Russian government expects naïve foreign investors to forget that there are no real audits of the companies to be sold, that the true owners are masked, and that these companies are run in the interests of the insider shareholders from Putin’s inner circle. Do not forget the past history of dilution and other cavalier treatment of minority shareholders. But the new Russian government is promising that this time will be different. Let’s wait and see.

The only reason to consider buying shares of Russian state companies is to wager that the corruption and mismanagement have been more than fully discounted. Investors cannot invest for value considerations.

If any one doubts what I am saying go to Alexei Navalny’s publication on his web site of the official audit commission report that shows that the management of the state pipeline company stole $5 billion. Navalny is not citing secret documents, but publicly available documents. This news did not seem to turn any heads. This is business as usual in Russia.

Consider United Grain and Novorosiisk Port. Both engage in activities that invite corruption and embezzlement by management. Tales of the corruption of Novorosiisk port have been floating around for a decade.

We’ll see how many foreign investors will walk down Russia’s new red carpet.

Dr. Gregory's latest book can be found at Amazon.com.