State sell-offs are good news for Russia, says Blackrock’s Vecht

Plans by the Russian government to launch a privatisation programme in a bid attract foreign investors have been welcomed by emerging market specialist Sam Vecht.

The ambitious programme, the scale of which exceeds even the post-Communist sell-off of the 1990’s, has already been initiated after the Russian government gave its initial approval to the planned $29 billion in assets sales, according to news reports.

‘We view this as evidence that the country is committed to taking significant strides to modernise its economy,’ said Vecht, who manages the firm’s Emerging Europe fund.

‘Reducing the share of the State in the economy and improving economic efficiency has been a major theme of President Medvedev's speeches and writings, policies that have been unfortunately overlooked in the West to date.’

The program involves the sale of stakes in some of Russia’s largest state-owned companies including the national oil company, the national railroad, a fleet of merchant marine vessels, two state banks and a company managing hydroelectric dams.

‘Opening up State-owned enterprises to external capital brings in much-needed investment to boost growth, but it also has the benefits of promoting transparency and bringing in foreign expertise. Helping to align the incentives between the State and investors, it should foster improvements in the climate for investment and business.'

‘A successful program could also deliver real cultural change, helping to deepen and broaden Russian financial markets and improving the participation of ordinary Russians in the equity of their own state-owned companies.‪ ‘

Vecht also believes Russia’s immediate future is a lot brighter than many analysts are predicting. He points out that GDP growth is likely to be around 5% in 2010, as the economy recovers from the recession, and inflation is at a record low.

‘Although the government is likely to run a modest budget deficit of 5% to support the recovery, this is very affordable in the current environment as public debt is a mere 6% of GDP thanks to the fiscal discipline displayed over recent years.

‘Despite all this, and its structural competitive advantage as a commodity powerhouse, Russian equities trade at just a 6x price/earnings ratio compared to 12x for global equities.’