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Revisiting ALROSA’s privatization

16 july 2012

A new wave of privatization in Russia based on the world’s experience

Lately, the Russian Federation and Yakutia’s local press ran a number of controversial publications on how to privatize the stock of ALROSA. However, if we proceed from the official sources of information, the situation looks well-defined and predictable. After Russia elected it President the country’s economic policy was finally determined. It pursues the aim to strengthening the powers of the federal center, as well as further reinforce market relations in the country along the course of de-monopolization, modernization and innovative development of the national economy.

However, the worsening price conjuncture in the global oil and natural gas market is expected to generate a higher national budget deficit, which is assumed to be offset by selling state assets including equities of large companies and banks. All the more so that in line with the previously adopted plan in the Russian Federation it is supposed to sell government-held stakes in large state-owned companies, including ALROSA, in 2012-2016. According to the order of the Russian Federation Government issued on June 20, 2012, the Russian Federation will terminate its participation in the authorized capital of ALROSA before 2016, coordinating the sale of shares owned by the State and municipalities of the Republic of Sakha (Yakutia) with a possibility of financing the development of local infrastructure from the funds obtained due to the privatization of shares.

It is clear that privatizing large companies is not a well-defined issue and the authors of publications have taken different approaches to this problem. The world economic practice shows that privatization and nationalization if they occur are equally dependent on the political and economic situation in each country. The objectives of privatization and nationalization - to increase budget revenues and build up competition in different markets - generally contradict each other, because the consolidation of companies to increase their value leads to lower competition, and therefore in reality it is possible to achieve only one of them.

For example, in South America there is an ongoing process of nationalization of a number of large companies engaged in mining minerals (Argentina, Venezuela and Bolivia). In particular, in Argentina in mid-April 2012 it was decided to expropriate a 51% stake in oil company YPF belonging to Spain’s Repsol. However, in practice, the transition into state ownership does not increase the efficiency of these enterprises.

Also in response to the crisis in the euro zone nations, including Greece, Spain and several other countries, a large-scale privatization of state assets is considered as one of the measures to attract additional financial resources.

Thus, in times of crisis, many governments are buying or nationalizing in other ways loss-making companies, actually saving them from bankruptcy, whereas traditionally loss-making industries remain in government hands. Later, when they become profit-earning companies once again, they are re-privatized. At the same time to raise funds in order to reduce the budget deficit, the governments privatize liquid state assets. Consequently, other countries are pursuing a policy of combining nationalization and privatization.

Privatization of ALROSA: in search of an optimal option

According to our initial proposal, which can be considered optimal, during the privatization of the company the Russian Government could reduce its stake from 51% to 32% by selling 19% of shares, which will make it possible to raise additional funds for the federal budget of Russia. On the next stage, when the consequences of the global economic crisis will be completely overcome, ALROSA should venture an IPO by additionally issuing 28% to the existing number of shares. In this case, the stake of the Russian Federation Government and that of Yakutia will be reduced from 32% to 25% plus one share, while their total stake will be diminished to 50% plus two shares, i.e. the controlling stake will be held by the state (Fig. 1).

Fig. 1. Distribution of ALROSA shares under the optimal option

Other options are possible

Turning ALROSA into a public company in 2011 was the logical result of its procedural and institutional transformation, which gives additional opportunities to attract investment and improve the diamond miner’s efficiency. The events accompanying the transformation of ALROSA, which is taking place from early 2011, fully confirm the prediction made in the authors’ previous publications on this subject. Moreover, in the analytical note "Making ALROSA a public company and ways to transform it" as of 02.11.2010 sent to the Prime Minister of the Republic of Sakha (Yakutia) and the National Assembly (Il Tumen), we assumed that the company would release 28% of shares to be added to the existing shares for a subsequent IPO. It was this decision that was taken at the company’s general meeting of shareholders and then reflected in the latest version of ALROSA’s Charter. Besides, we assumed that ALROSA’s shares would be privatized.

At present, the shareholders are tackling the issue of privatizing some part of the stakes owned by the Russian Federation and the Republic of Sakha (Yakutia). Russia’s Federal Property Agency and Ministry of Economic Development (Fig. 2) suggest that the Government of the Russian Federation and that of Yakutia sell 7% each from their corresponding stakes in the company. At this stage, the Russian Federation Government suggests to reduce its stake from 51% to 44% making private 7%. The Republic of Sakha (Yakutia) will also sell 7% of its shares and bring its stake to 25%. However, this will affect the next stage, when the company is to carry out an IPO involving additional issue of 28% to the existing number of shares, as reflected in the latest version of the company’s Charter. However, Ilya Yuzhanov, Chairman of the Supervisory Board of ALROSA, who spoke in an interview to the Vesti 24 TV Channel, said: "There are several points of view on the extent to which and how to privatize the shares. One option is to float a 14-percent stake including 7 percent owned by the Russian Federation and 7 percent owned by the Republic of Sakha (Yakutia). This option is supported by the Board of Directors of the company. For them, this is the most viable option. But this does not mean that it will ultimately be approved."

Fig. 2. Distribution of ALROSA shares in line with the privatization option offered by the Federal Property Agency and the Ministry of Economic Development of the Russian Federation

In our view, not a single share should be sold from the stake (32%) owned by the Republic of Sakha (Yakutia), since the republic will be left with 19.5% of shares and may lose the blocking shareholding in case of a subsequent IPO, because the shares owned by the Yakut uluses (districts) are municipal property and not the property of the republic.

For the Republic of Sakha (Yakutia), the rough and polished diamond complex is a core sector of the economy and a major donor to the budget of Yakutia, whereas ALROSA is its backbone (Table 1).

 Table 1

 The role of ALROSA in the economy of the Republic of Sakha (Yakutia) in 2001-2011

 Rubles, million

The table is compiled by the authors and based on the data provided by the Federal Statistics Service of the Russian federation and by the Territorial Agency of Russia’s Federal Statistics Service for Yakutia, as well as on reports and documents published by ALROSA in 2001-2011
*According to the Ministry of Economic Development of Yakutia; **Authors’ estimate.

Currently, the share of ALROSA in the gross regional product of Yakutia is more than 29%. It produces almost 40% of industrial production and provides about a third of tax revenues in the consolidated budget. ALROSA employs about 33,000 people in its core operations and in view of the entire support infrastructure and social services provided by the company its manpower exceeds 60,000 people, or nearly 12% of the total working population in Yakutia. Clearly, there is a vital need to maintain the state control and supervision over the activities of ALROSA by the Republic of Sakha (Yakutia).

At the meeting of ALROSA’s active functionaries held on February 28, 2012, Yegor Borisov, President of the Republic of Sakha (Yakutia), said that the diamond company will remain state-controlled. According to him, the Government of the Republic of Sakha (Yakutia) should have a 25% stake plus one share and the Government of the Russian Federation should as well have a 25% stake plus one share. The more stable is the situation in the diamond company, the more stable it will be in the republic, Yegor Borisov said and was quite right.

According to our option (Fig. 3), for the Republic of Sakha (Yakutia) it will be better to sell (privatize) 7% from the 8% of shares owned by the uluses (districts) of the diamond province. At the same time, the 32% of shares after the proposed additional issue of 28% of shares (in case of an IPO) will make a blocking stake of 25% + 1 share.

That is, the Republic of Sakha (Yakutia) must sell shares not from the stake owned by its Government (32%), which are a state property, but some part of the stake owned by the 8 uluses (districts) of the diamond province. Russia may sell up to 19% from its stake, i.e. leaving 32% in its ownership, which in case of a possible IPO (involving an issue of 28% of additional shares to their existing number) will be diluted to 25% + 1 share (32 : 1.28 = 25). In this case, after an IPO, the Republic of Sakha (Yakutia) is guaranteed to have a blocking stake (25% +1 share), the uluses will have 0.1% of the company’s shares, the Government of the Russian federation will have 34.3% and individuals and legal entities - 39.9%. 

Fig. 3. Distribution of ALROSA shares in line with the new privatization option offered by Yegor Yegorov and Yuri Danilov

Now it is worth reviewing the advantages of privatizing the shares held by Yakutia’s uluses (districts) in terms of dividends paid (Table 2).

Table 2

Dividends paid by ALROSA in 2000-2010

Note: The 2008 dividends were not paid because of the economic crisis.

Table 3

Dividend accruals and payments to major shareholders

Rubles, million

According to the annual report of ALROSA for 2011

The shares currently held by the uluses are worth 2,317.95 million rubles by their market value. It is expected to sell 7% of shares from the 8% held by 8 uluses, which makes 0.875 of the stake held by each of the uluses or 64,433,930 shares with a par value of 0.5 rubles or 32.217 million rubles. After privatization each ulus (district) will have 9,208,705 shares with a total par value of 4.6 million rubles. The market value of traded shares owned by each ulus (district) will be 2,028 million rubles. If the proceeds from selling these shares will be put to a bank deposit at 8% per annum, each ulus (district) will receive 162 million rubles annually, or nearly 9 times more than the dividends for 2010 and 7 times more than the dividends for 2007, when the company paid the highest dividend per share. Even the intended payment of dividends for 2011 distinguished for its record performance will be much smaller than the expected profit from the bank deposit.

Thus, from an economic point of view, the sale of some part of ALROSA shares (87.5%) held by Yakutia’s uluses (districts) they can obtain a substantial capital and use it to their benefit, which will make it possible to implement their long-term investment projects. Furthermore, it should be noted that the uluses (districts) of the Republic of Sakha (Yakutia), being the company’s shareholders do not play a significant role in taking decisions on long-term issues. This is why it would be better to preserve a blocking stake to the Government of Yakutia.

Yegor Yegorov, Doctor of Economics, Professor, Academician of the Academy of Sciences of the Republic of Sakha (Yakutia), Director of the Institute for Regional Economics of the North at the Ammosov North-Eastern Federal University

Yuri Danilov, Ph. D., Director of Department for Regional Subsoil Management Economics, Institute for Regional Economics of the North at the Ammosov North-Eastern Federal University