Photographer: Jason Alden/Bloomberg

Russia Fleeced as Alrosa Sale Leaves $313 Million on Table

  • Alrosa outperforming Micex almost 10-fold since share sale
  • Government resumed asset sales as deficit at widest in 6 years

For a country that’s just scraping by, Russia may have been too generous in leaving 20 billion rubles ($313 million) on the table after its biggest asset sale in three years.

Two and a half months after President Vladimir Putin’s government resumed its most ambitious program of state-asset sales in almost a decade, hindsight shows Economy Minister Alexei Ulyukayev was probably too quick to declare the sale of a stake in the world’s largest rough-diamond producer “exceeded expectations.” Priced at 65 rubles a share in the July offering, Alrosa PJSC closed on Monday almost 38 percent higher at a record 89.99 rubles, meaning the government effectively lost out on almost 20 billion rubles.

“For the government, of course, it would have been cheaper to borrow on the domestic market,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail. “But what’s done is done. Such is the market.”

The deal, which mostly attracted investors from Europe, Russia and the Middle East, was part of an effort by the government to patch up the budget following the collapse in oil prices. Russia is targeting over 1 trillion rubles from divestment in state property in 2016, while also opting to increase borrowing and trim spending. 

Bashneft, Rosneft

The program has already hit a snag. Authorities last month delayed what would have been their biggest asset offering in a decade after renewed weakness in global oil markets and tensions among potential buyers upended plans to offer as much as 50.08 percent in Bashneft PJSC, a regional oil producer. Other stock sales envisaged by the government include Rosneft PJSC, the biggest oil producer, and shipping company Sovcomflot PJSC.

Alrosa’s gain since the July 8 sale compares with a 4 percent advance in the Micex gauge. And it could have been worse. Ulyukayev has said the government was ready to agree to price the stock at less than 65 rubles, with the shares eventually sold at a 3.8 percent discount to their closing level at the last trading sale before the offering.

For Goldman Sachs Group Inc., there are three reasons why Alrosa has outperformed the index. In addition to global demand for rough diamonds, the Finance Ministry has proposed increasing dividend payouts by state-controlled enterprises to 50 percent and the government removed a 6.5 percent export duty on rough diamonds as of Sept. 1.

‘Largely Random’

“The state really starts privatizing when there’s no other option to fill the budget and sells what it thinks is relatively easy to sell,” Vyacheslav Smolyaninov, an equity strategist at BCS Financial Group in Moscow, said by e-mail. “All the decisions made are solely tactical, and the timing looks to me largely random.”

The rally may have further to run. While Goldman Sachs analysts led by Vahe Ovasapyan removed Alrosa stock from their regional focus list in a research note dated Sept. 26, they said the shares could climb as high as 103 rubles apiece. Alrosa closed 3.3 percent weaker on Tuesday at 87 rubles and fell a further 1.1 percent by 4:23 p.m. on Wednesday.

The suggestion that the government inadvertently had a hand in guiding Alrosa shares higher in the months after the sale raises questions about the effectiveness of its program to raise capital. Already running its widest deficit since 2010 this year, the Finance Ministry’s proposals call for balancing the budget only by 2020.

Even after the delays, this year’s budget plan still assumes more than 1 trillion rubles in proceeds from asset sales, and the Finance Ministry expects the main asset sales to be completed this year.

Investors are also keen on the prospects of the two oil companies on the block. Bashneft is up 12 percent since the Alrosa sale, while Rosneft has added 4.9 percent.

“We may see a replay of choosing the non-optimal timing for the sale of Bashneft and Rosneft,” said Losev, who sees oil prices rising to as much as $70 a barrel next year. “If the sale of state assets occurs right now, investors will get very good assets with a very big upside.”

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