Issuing privatization bonds may be good for Russia’s budget

10 march 2016 | RIA Novosti

“Issuing privatization bonds may turn out to be a fairly effective tool in solving budget deficit problems in a situation where unfavorable global market conditions are expected to persist,” Analytical Center expert Mr. Daniil Nametkin told RIA Novosti in an interview.

Daniil Nametkin
Daniil Nametkin
Department for Expert Analytics

Earlier Minister of Finance Mr. Anton Siluanov said that his ministry had found an unorthodox way to sell state assets at a higher price than they are valued at now. The idea is to issue bonds redeemable with shares in state companies. According to him, the scheme should work as follows: suppose there is a state company that is to be privatized and its shares are trading at a particular price. The Ministry of Finance issues bonds at a price above the share price of the company, with said bonds being converted into shares of the company in question in 3-5 years or with the holder of the shares getting the market value of those shares at maturity.

“This strategy will allow us to take into account the interests of both the seller, which is the state, and the private investors, despite the difficult market conditions we are facing today. Thus the state can raise more money by using this privatization scheme to finance the federal budget deficit while the buyers may get capital gains in the future if the stock market goes up in the long term,” the expert said.

Representatives of the Ministry of Finance said at this moment the government is not regarding this scheme as a priority privatization mechanism. However, Mr. Nametkin believes that it is highly likely that eventually a decision will be made to go ahead with it. “When we look at the trends in the futures for Russian securities, some of which are currently trading higher than the underlying securities on a time horizon of 3-6 months, this approach to privatization seems highly likely,” he said.

According to him, in addition to classic investment funds, privatization bonds may be of interest to equity funds interested in low risk long-term investment instruments. “When deciding on the currency these securities are to be denominated in, it would make sense to base that decision on the structure of the company’s revenue,” the expert believes.

Source: RIA Novosti