During his address yesterday to the Federal Assembly, President Vladimir Putin set out his vision of ongoing privatization, arguing that it should differ from the first privatization wave of the 1990s with its "loan-for-share" schemes. The president also noted that divesting state property should be a "fair and transparent" process at a "fair and reasonable price," while privatization-related transactions should be carried out on Russian trading platforms. "The state should be a role model in operating in the Russian jurisdiction by favoring domestic stock exchanges for floating shares in state-own enterprises during privatization," the president pointed out.

According to the State Property Management Agency, two mechanisms could be used to implement this vision. "The first goal would be to highlight the importance of the Moscow Stock Exchange for placing state property, and the second objective would be to boost liquidity on the Russian market by investing pension savings," the agency told RBC Daily.

The Moscow Stock Exchange, which emerged from a merger of the RTS and MICEX stock exchanges and is thus a de facto monopoly bourse in Russia, said it is ready take up the president's challenge. "The Moscow Stock Exchange has always championed the idea that privatization should contribute to developing the Russian stock market and establishing an International Financial Center in Moscow, which would boost the stock market's appeal among foreign, as well as Russian investors", CEO of the Moscow Stock Exchange Alexander Afanasyev said.

However, even if the local trading infrastructure succeeds to handle placements carried out by Russian companies, local investors would be unable to meet the supply, Maxim Firsov from IFC Metropol noted. "Privatization deals at attractive prices are currently impossible unless foreign investors are involved, so speculating on floating shares in Russia is good, but real steps aimed at facilitating stock trading for foreign players in Russia and boosting the market's investment appeal should be taken in order to improve the situation," he argued.

"London is already ahead of Moscow in terms of trade volumes with Russian shares. This is not a coincidence, and the authorities should give some thought to this situation. The Russian economy in many ways falls short in terms of its appeal, so foreign investors are reluctant to get involved," CEO of Grandis Capital Investment Company Alexander Sobolenko said. In fact, over 97% of the 7.58% stake in Sberbank, which was privatized in September 2012, was sold on the London Stock Exchange, although initially the Moscow Exchange was expected to offer up 15% of the stake. Rail monopoly Russian Railways, which is set to privatize a small stake in 2013, also said it could opt for LSE.

Russian issuers tend to prefer foreign stock exchanges for a number of reasons, such as a more convenient environment, Nikota Krichevsky from the Opora Russia association, which promotes the SME segment, pointed out, arguing that while is takes up to eight months to prepare a placement in Russia, a foreign exchange handles the same issue in just three or four months.

However, Dmitry Pankin, who heads the Federal Financial Markets Service, downplayed these gloomy opinions, arguing that in 2007 companies turned in numbers to Russian stock exchanges, which handled all the placements successfully. In addition, the local infrastructure has been significantly improved lately with the creation of the Central Depository and the approval of a law on clearing operations, Pankin went on to say.

Nevertheless, he admitted that pinning hopes on local investors would not be advisable, even though domestic players have such a potential. "According to the Finance Ministry, privatization proceeds are expected to total some RUB 430bn (approx. USD 13.99bn) in 2013, while the Economic Development Ministry expects revenue to be in the range of RUB 260bn-270bn (approx. USD 8.46bn-8.78bn). The National Pension Fund currently holds RUB 600bn (approx. USD 19.52bn), and another RUB 750bn (approx. USD 24.41bn) has been set aside as reserves, and a portion of these funds could be channeled into privatization," Pankin noted.

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