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Possible Benefits of Privatization

Writing in the Moscow Times, Kim Iskyan argues that, despite many critics’ skepticism, the Kremlin’s recenlty-announced privatization plan could bring some positive developments, namely, help create a push for a better, less corrupt investment climate:

[E]ven if the program won’t change the Kremlin’s fundamental position that the government should play a central role in the economy, a sell-off of significant state stakes in the country’s leading companies could nevertheless bring about real and positive change in the investment climate.

First, there will be a substantially stronger contingent of minority shareholders in a much larger number of state-controlled firms. Corporate governance standards in Russian companies are generally poor but have been slowly improving. A larger — and thus stronger — class of minority shareholders among Russian blue chips may generate sufficient momentum to produce material and permanent improvement. With time, minority shareholders may be able to force these companies to become more transparent, which could have a ripple effect among other companies.

In recent years, there has been meager progress in addressing thestructural challenges of corruption, weak rule of law and politicalrisk that define Russia’s investment environment. But with a genuinefinancial incentive and a concrete deadline to improve the country’sinvestment environment, the government could finally discover the willto make progress in addressing the issues that contribute to thevaluation discount of Russian assets compared with those of otheremerging markets. The Kremlin must understand that bona fide changecould result in a positive re-rating of Russian market valuations.This, in turn, could result in billions of dollars of incrementalrevenue in privatization sales. It could also trigger sharp growth inforeign direct investment, give hope to the Kremlin’s aspirations ofturning Moscow into an international financial center and have a hostof other positive knock-on effects.

In recent months, the government has elevated its rhetoric aboutimproving the country’s investment environment. The challenge now willbe to follow through to show that its objective is more than justchanging perceptions but altering the real business climate. One goodstart would be the obvious low-hanging fruit of effectively easing thevisa regime for foreigners interested in investing in the Russianeconomy.

A transparent, nondiscriminatory and fair sale of state assets would bea critical achievement and a sign that Russia is truly serious aboutimproving its investment environment. History is not particularlyencouraging when assessing whether this time things will be different.But a number of pieces may be falling into place.