Russia has decided to delay the sale of a 5.9 percent stake in number one oil producer LUKoil, its biggest privatization sale of the year, because of unfavorable global market conditions.
The LUKoil flotation in London this week had been seen as a key test for the fate of Russia's 2002 budget revenues as well as the local stock market.
The Russian government is now expected to dig into a special reserve fund of budget surplus money to plug the hole in state coffers left by the LUKoil sale delay.
LUKoil also announced that it had made an application for a secondary listing on the London Stock Exchange, which the company said was slated to go into effect Aug. 6.
Russia had hoped to net about $800 million from the LUKoil stake, but the company's shares have lost about 20 percent of their value over the past two months in line with a serious drop in global markets.
There was no immediate information as to when the government's LUKoil stake might now be put up for sale.
Officials said the decision to postpone the sale was made in London by Trade and Economic Development Minister German Gref but still expressed confidence that Russia could earn top dollar on the stake once world markets rebound.
"We are absolutely confident about the value of this packet of shares, and we propose to sell it at a higher price. The period of privatization in Russia at knock-down prices is over," state privatization committee chief Vladimir Malin was quoted as saying by the news agency RIA Novosti.
"Our main task is not to obtain money for the budget, and we can wait for the market to even out," Gref was quoted as saying by the Interfax news agency. "It's not the best time for a placement because the market is falling."
The Russian government had been severely criticized for many of its privatization sales in the mid-1990s, when state assets were often bought up by government insiders at minuscule prices in what had widely been seen as fixed deals.
The Russian government currently controls about 14 percent of LUKoil.
Last week's decision disappointed Western investors, who predicted a steep long-term drop in both the LUKoil share price as well as Moscow's main RTS index, where LUKoil is a dominant player.
"The success of the new offering would largely be dependent on two considerations - LUKoil's progress in internal restructuring and the oil price," the Renaissance Capital investment bank said in a research note.
"On the negative side, the existence of $700million - 800 million worth of overhang in LUKoil shares, which could come to the market at any time, will continue to place downward pressure on LUKoil stock," the bank added.
However LUKoil's shares actually rose 3.73 percent at mid-day RTS trading Aug. 1 on what brokers said was surging demand from foreign investors who had been hoping to buy up LUKoil's global depository receipts in London.
"This decision signals the government's reluctance to privatize its holdings at any price," said the Aton Capital bank in a note.
"We do not believe the postponement of the sale jeopardizes the government's ability to meet its external obligations this year as any shortfall can be covered by the state's financial reserve."
Later this year, the government is also planning to put up a 19 percent stake in the oil company Slavneft, the focus of a bitter power struggle last month between two Russian government factions that investors fear may lower the expected $300 million to 350 million dollar price tag.
Last week, Prime Minister Mikhail Kasyanov announced that Russia intended to speed up its privatization sales in 2003 despite indications that government revenues from this year's sales were falling far short of expectations.
The government said that privatization next year should bring revenues of 51 billion rubles (1.63 billion euros), up about 50 percent from the figure originally forecast for 2002.
The planned 2003 sales included a 17.87 percent stake in the massive Magnitogorsk steel mill.
Government officials have long pointed to 2003 as a "crunch year" in which most of its foreign debt burden falls due.
Just hours after the government's decision, LUKoil's listing on the London Stock Exchange was announced, making it the first Russian company to be traded in Britain.
LUKoil Chairman Vagit Alekperov told reporters the move highlighted the group's progress toward becoming a transparent business.
"We have gone a long way. We have improved our disclosure, corporate governance, transparency. We are deemed worthy of this listing. It will improve the industrial base for our company," he said.
Ian Salter, deputy chairman of the LSE, said the move "demonstrates the great importance we attach to our links with Russia."
He added: "Russia is a priority market for the LSE. It is an important step to attract other Russian companies."