Desperately Seeking Share Sales

To get an idea of how the bears are clawing at Russia's fledgling stock market these days, consider the case of Unified Energy System, still 61% owned by the government. In August, the Kremlin announced plans to sell off a 10% stake in the giant, blue-chip utility. Immediately, investors began dumping UES shares to beat an expected price collapse when the scheduled mid-October auction glutted the market with new shares. Indeed, UES shares fell from a summertime high of $14.50 to $7.50 in mid-October. If anything, they could sink further because the auction has been delayed for several weeks.

UES is not the only Russian stock taking a beating as a result of government moves. Since early July, the market has lost 30% of its value (chart). The downdraft is largely the result of Russian officials' scrambling to find cash to plug a $5.1 billion hole in the 1995 budget. They hope to raise as much as $2.2 billion by the end of the year through share sales and other privatization schemes.

The Kremlin's urge to sell shares is getting added impetus as officials run scared before the December legislative elections. Worried that a Communist victory, which now seems likely, could slow down privatization, the government wants to get more shares in private hands fast. Trouble is, the market can't sop up that much equity that quickly. To move shares, the government must offer them at bargain prices. For example, a 51% stake in oil giant Sidanko will go for $125 million, or about 2 cents per barrel of reserves.

The government fire sale is putting pressure on a market that is already suffering from oversupply. Whereas foreign buyers drove the Russian stock market in 1994, this was supposed to be the year when domestic investors, especially banks, played a bigger role. Instead, Russia's banks are selling off equity holdings to ease a liquidity crisis that hit its peak in late August. "Even though the market is cheap by anybody's measure, there are still a lot more people who want to sell shares than people who want to buy them," says Bernard Sucher, managing director of Troika Dialog Investment Co.

Meanwhile, companies are doing all they can to limit their participation in a controversial loan-for-equity scheme. That plan has been drastically scaled back since it was floated in March by a bank consortium, but government officials still expect to raise $665 million by the end of November through share auctions. Banks and other institutions will offer to lend money to the government in exchange for trust management over state shares in privatized companies. When the shares are eventually resold, anywhere from three months to three years from now, the lender will get back the loan principal plus 30% of what the shares fetch.

CONTINUED TURMOIL. So while low share prices are great for the cash-strapped banks, blue-chip companies aren't happy with the low proceeds. Gas monopoly Gazprom withdrew completely from the loan-for-equity program. And blue-chip oil company Lukoil was able to persuade the government to sell off only a 5% stake under the plan, down from 15% originally.

The Russian market is likely to remain depressed at least until the December elections. If the Communists do well, Western investors will once again grow wary of Russia for a time. But the Russian Parliament has little power compared with the President: If Boris Yeltsin wants to continue to push through reforms, he can go ahead and do it. And it is far from clear that the Communists would launch a renationalization campaign. So far, they have emphasized a slower pace of reform and higher subsidies for industry.

Still, Russia's political turmoil could even last until presidential elections in June. In the meantime, stock-market bargains abound--but only for the bold.