Russia Planned Asset Sales to Outshine Peers, East Capital Says

By Paul Abelsky

Oct. 20 (Bloomberg) -- Russia’s plans to sell state assets next year will lure investors eager to take advantage of the country’s attractive valuations compared with its peers in the region, according to East Capital Asset Management.

“From our point of view it’s very easy -- we think Russia is always more interesting as we look at valuations,” said Peter Elam Hakansson, chairman of East Capital, a Stockholm- based fund manager investing in eastern Europe with about 3 billion euros ($4.5 billion) in assets under management.

Russia wants to sell state energy and transport holdings to help plug the country’s first budget deficit in a decade and to speed up the makeover of its aging infrastructure. The state has earmarked about 5,500 enterprises for divestment and will sell shares in companies that are already publicly traded, including OAO Rosneft, the country’s biggest oil producer, First Deputy Prime Minister Igor Shuvalov said on Sept. 22.

“There’s a different type of attraction for different types of investors,” Hakansson said. “As Russia is maturing in its market development, you will see more” institutional investors interested in stable cash flow. “They will welcome things other than oil and gas to invest in.”

The government wants to generate 70 billion rubles ($2.4 billion) in 2010, 10 times the original target, by selling all or part of state stakes in 450 enterprises. Sales will consist mainly of airports and river and sea terminals.

Adds to Appeal

The world’s biggest energy exporter needs the funds after the global recession undermined commodity demand and pushed Russia’s economy into its worst contraction on record. Prices for crude oil, 30 percent of the country’s output, slumped by more than two thirds from its peak in July 2008 until the beginning of this year.

While the government needs to finance the budget shortfall, Russia also is seeking to attract private investors to help modernize derelict infrastructure. This adds to the appeal for investors, East Capital’s Chief Economist Marcus Svedberg said, because it increases growth potential. East Capital will target shares in assets linked to domestic demand, rather than stocks that track energy prices.

The fund lowered its holdings of oil and gas stocks to 37.7 of the total at the end of June, compared with 48 percent at the end of last year. It also increased holdings in banks, and bought up shares in the metals and mining industry.

Infrastructure Overhaul

Russian officials including Prime Minister Vladimir Putin have said they want to use crisis measures to overhaul infrastructure and become less reliant on oil and gas exports.

The country needs to spend $875 billion on developing its transportation network, Renaissance Capital said last year. Private investors may finance 80 percent of the $1 trillion the government predicts will be spent on an infrastructure overhaul until 2020, according to Standard & Poor’s.

Moscow and the surrounding region lose 400 billion rubles a year from traffic delays, while drivers waste more than 12 1/2 hours in congestion each month, the Transport Ministry estimates. The capital has an average of 650 traffic jams a day. Gridlock can only worsen as the number of cars is set to double by 2015, the ministry estimates.

Russia isn’t the only former communist country resorting to divestments to bolster finances. Poland plans a record $10 billion of asset sales through next year, offering stakes in power, oil, copper, phone and insurance companies to help plug a deficit the European Commission estimates will reach 7.3 percent of GDP in 2010. Belarus has targeted 2011 for selling a number of state-run companies.

Lower Valuations

“Most of the time Russia has lower valuations than Poland, for right or wrong, but that’s the case,” Hakansson said. “One reason is that there are very strong pension funds in Poland pushing up the valuations. But if you have the same rates of growth, but you have a lower price in Russia, we will be buying Russian assets.”

The ruble-denominated Micex Index, which has surged 120 percent this year as crude oil jumped to $79 a barrel, is priced at 13.13 times earnings. Poland’s WIG20 Index is traded at 16.12 time earnings, according to data compiled by Bloomberg.

“A number of these countries need to bring down debt, balance the budget or reduce the deficit. For Russia it’s not necessarily that. They are not that pressed for money in the short term,” Svedberg said. “There is a clear understanding that Russia needs more technology.”

Outperformed

As of the end of 2008, East Capital’s Russian fund, which oversees about 2 billion euros, returned 5.1 percent on average in the previous five years and brought in an average return of 17.2 percent since its inception in May 1998. It lost an average 18.8 percent in the past three years. The fund gained 53.6 percent in the first six months of this year, compared with a 56.9 percent jump in the benchmark RTS stock index during the same period, according to the fund’s first-half report.

Svedberg says investors can expect more privatization throughout the region as opportunities to buy into assets whose growth had been restricted by state ownership spreads.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.