Following the relative stabilization of economic conditions globally (especially in terms of the price of oil) and in Russia (the ruble exchange rate) the Russian capital markets have shown signs of recovery. This article focuses on a couple of key aspects of the Russian equity capital markets’ development this year, such as privatization and the increased participation of non-state domestic pension funds in equity transactions.
In February 2016, the Russian Government announced its plans for the privatization of state-owned shares in a number of Russian companies, such as the ALROSA diamond mining company, the Bashneft and Rosneft oil companies, VTB Bank, and Sovcomflot.
Generally, Russian Privatization Law No. 178-FZ establishes the regulatory framework for privatizations of Russian state and municipal property. In particular, it prescribes specific options for disposing of state property, requirements applicable to potential purchasers of state property, and extensive procedures to be followed in connection with the implementation of the relevant option. At the same time, the Russian Privatization Law provides that its provisions shall not apply to certain types of disposals of state property, such as, for example, “disposal of state property based on the resolution of the Russian Government adopted with an aim to create conditions to attract investments, stimulate the stock market, and modernize and technologically develop the economy.”
In June 2016, the Russian Government issued resolutions: (i) approving the appointment of Sberbank CIB, VTB Capital, and Renaissance Capital as agents of the Russian Federation in connection with the privatizations of ALROSA, Bashneft, and VTB Bank, respectively, and (ii) stating that the share sales in ALROSA, Bashneft, and VTB Bank should be conducted with “an aim to create conditions to attract investments, stimulate the stock market, and modernize and technologically develop the economy.” The latter statement means that the transactions were intended to be exempt from the requirements of the Russian Privatization Law and instead carried out pursuant to resolutions of the Russian Government establishing specific requirements applicable to them. The June 2016 resolutions also approved the principal terms of the agency agreements with the selected banks. Typically, following its review of the agent’s report identifying the preferable method for privatization and consulting with the relevant authorities (such as, for example, the Ministry for Economic Development (and the Ministry of Energy for energy companies)), the Russian Government then decides on the method for privatization (for example, sale via public offering or via a private sale to strategic investor(s)). As soon as the preparation for sale is complete and the potential purchaser(s) selected (and, in the case of a shares offering, bookbuilding is complete), the Russian Government issues a resolution approving the share price and other principal terms of the share purchase agreement with the indicated purchaser(s) (in case of a share offering, one of the underwriters acts as a purchaser). Finally, the agent acting on behalf of the Russian Federation signs the agreement with the purchaser(s).
This year the Russian Government has already completed the sale of a 10.9% stake in ALROSA via a secondary public offering (July 2016 for approximately USD 820 million), and the sale of a 50.08% stake in Bashneft via a private M&A sale to Rosneft (October 2016 for approximately USD 5 billion), which was the largest Russian privatization since the 2013 IPO of ALROSA.
Domestic Pension Fund Potential
Earlier this year the Central Bank of Russia (the CBR) amended the rules regulating the investments of pension savings made by Russian non-state pension funds (NPFs). Further to these amendments, NPFs are now allowed to participate in privatizations, which are conducted via over-the-counter sales of the state’s or the CBR’s stakes in the companies being privatized, provided that the Russian Government or the CBR approves the purchase price and the share sale transaction is executed on a DVP basis within 10 business days from the date of that approval. Previously NPFs were allowed to participate in privatizations conducted via organized trades of the stock exchanges only.
Following these amendments, Russian NPFs participated for the first time in a privatization transaction in July 2016, when they purchased in aggregate approximately 20% of the privatized stake in ALROSA. Although currently Russian NPFs allocate over 80% of their assets to fixed income (including bank deposits), the global tendency is that as pension funds mature and their assets increase, the share of equities will become more significant.