Opportunities for Russia and China in Greek Privatization

Greece's privatization efforts have become central for the new approximately 65 billion to 70 billion euro ($94 billion to $101 billion) bailout package being finalized by eurozone member states and expected to be approved by the June 20 eurozone finance ministers' meeting. As the chief condition of the new bailout plan, Greece's eurozone partners are demanding that Athens speed up its sale of publicly held assets and shift the responsibility of privatization from the government to an independent agency that would, sources tell STRATFOR, have considerable input from foreign governments. In other words, Greece needs to sell about 50 billion euros worth of public assets by 2015 and on terms that satisfy Germany and other eurozone countries, regardless of the preferences of the Greek state, which owns the assets, or the Greek public, which depends on them for employment. Greek privatization is a divisive issue that is threatening Prime Minister George Papandreou's hold over his ruling PASOK party. There is a danger PASOK could revolt against Papandreou and eurozone austerity measures, putting Europe's bailout efforts into question and worsening the sovereign debt crisis in Portugal and Spain. The long-term issue, however, is the effect that such wide-scale privatization will have on strategic Greek assets, such as ports and pipelines, which could find interested investors in Russia and China, giving these powers a backdoor into Europe's transportation and energy infrastructure.

Pain of Privatization

The new eurozone bailout plan has caused a political crisis in Greece. The planned privatization of state enterprises means further layoffs of public sector workers, and the Greek unemployment rate is already at 16.2 percent, more than 3 percent higher than a year ago. Employees of Greek power utility PPC, telecommunication company OTE, and water utilities EYDAP and EYATH have called a 24-hour strike for June 9 to protest the privatization efforts, while the main private and public sector unions, GSEE and ADEDY, will organize a general strike in the country June 15. Privatization, under most conditions, is painful. Inefficiencies built into public companies due to political logic — such as redundant employment, subsidized pricing of goods and services, and wage inflation — are unraveled, to the consternation of a large segment of the population. Furthermore, management positions in publicly held utilities and businesses are often lucrative posts, which political leaders use to reward party loyalists, or are often directly funded from the revenue of the public companies. Thus, the workers facing unemployment and the citizens protesting higher prices for goods and services are not alone in resisting privatization; political elites, who are left without important sources of economic revenue and patronage, also oppose it. This is why, historically, successful and thorough privatization drives require a political outsider in the country to take control and use privatization to evict established and entrenched elites. Papandreou and PASOK are not at all political outsiders. Although it was out of power for five years before defeating the center-right Nea Dimokratia in 2009, PASOK had been in power in Greece for 20 years since 1974. Therefore, the greatest danger in terms of opposition to privatization is not from the mounting protests and strikes on the streets of Athens and other Greek cities, which are largely apolitical and offer no real alternative to the ruling party, but from Papandreou's own party. The events of the next few weeks will be crucial for Papandreou's ability to retain control of his party. Because PASOK's popularity has declined significantly, early elections would not benefit its members. However, Papandreou may be able to use the prospect of being voted out of office to scare dissenting members of parliament into supporting the new austerity measures. This depends on a number of factors, including that street protests do not become violent or get out of control, which is not likely. (click here to enlarge image)

Opportunities in Privatization

A painful privatization drive for Greece, however, presents opportunities for others to gain assets at potentially below market value. German companies are interested in a number of Greek assets, which is certain to frustrate the Greeks, who see the forced privatization drive as a loss of sovereignty and a plot by Berlin to cheaply acquire control of potentially lucrative companies. On June 6, as the new bailout agreement was being negotiated, Germany's Deutsche Telekom acquired a 10 percent stake in Hellenic Telecommunications (OTE) for around 400 million euros, giving the German company a 40 percent stake plus one share in OTE. Athens is looking to sell another 6 percent of OTE to Deutsche Telekom, but the German telecommunication company has said it would invest further only if given full control over OTE's labor policies, which will enable significant layoffs — another example of how privatization can lead to social unrest. Russian and Chinese companies also are looking to use Greek privatization for geopolitical gain. For China, Greece is an interesting strategic entry point into emerging markets in Central and Eastern Europe. China would use the Greek ports of Piraeus and Thessaloniki to bring its goods to the Balkans, former Soviet countries like Ukraine and Belarus, and Central European EU states like Hungary, Slovakia and Poland. Beijing's logic is that it could expand its trade in Central and Eastern European countries where, considering the region's generally lower income compared to Western Europe, the price point for Chinese exports would be highly competitive. China Ocean Shipping Co. (COSCO) made an investment in Piraeus in June 2010, leasing two container terminals for 35 years at a price of around $5 billion. COSCO's interest also was piqued when the Greek government announced plans to privatize its entire 75 percent stake in the Piraeus port authority, and the Chinese company wants to expand its investment both there and in Thessaloniki. Russia is interested in using Greece to block a key European alternative route for natural gas supplies. The European Union, which currently gets around a quarter of its natural gas from Russia, is looking for alternatives to Russian-dominated natural gas transportation pipelines. At the forefront of the union's plans is the "southern gas corridor," which is essentially an amalgamation of several different projects that would bring Azerbaijani and potentially Central Asian or Middle Eastern natural gas into Europe via Turkey. Greece is an important component of this plan since it rests on one route by which natural gas piped through Turkey would enter the European Union — the other option would be to run north through Bulgaria and Romania. From Greece, any proposed natural gas pipelines would have to make the short jump across the Strait of Otranto to Italy. There currently are a number of proposed pipeline projects that would constitute the EU southern gas corridor, of which three are central. The Nabucco pipeline is supposed to take the northern route from Turkey to Austria via the Balkan EU member states. Two other pipelines would take the southerly route from Turkey into Greece — the proposed Trans-Adriatic Pipeline (TAP) and the Interconnection Turkey-Greece-Italy (ITGI), of which the planned Poseidon offshore pipeline is the underwater part from Greece to Italy. The Greek government is directly involved in the ITGI project through its ownership of the Greek public natural gas company DEPA, which is collaborating with privately held Italian natural gas company Edison. The key for Russia, specifically natural gas giant Gazprom, lies in this particular southern corridor project. The proposed privatization of DEPA is therefore an interesting opportunity for the Kremlin. Gazprom has had its eyes on ITGI for years, negotiating with DEPA in 2010 to potentially gain an ownership stake in the project. The deal seems to have fallen through, with Gazprom now concentrating on the Greek plan to privatize DEPA — as much as 32 percent may be up for sale. This would give Moscow considerable influence when decisions are made about whose natural gas ITGI carries, turning ITGI from an alternative to Russian natural gas to an enabler of continued Gazprom dominance of Europe's natural gas market. The key question is whether Greece's eurozone neighbors will try to prevent China and Russia from gaining access to these geopolitically strategic assets. It is assumed that the new privatization agency, independent from Athens, would be heavily influenced by Germany since Berlin is contributing the most cash for the Greek bailouts. Still, it is unlikely that Berlin would look to ensure that Athens' strategic assets are purchased by fellow eurozone member states and not by Russia and China. Germany, an exporter of high-end, capital-intensive goods, does not consider China's low-cost goods export competition, which means there is no reason for Berlin to prevent Beijing's access to Eastern and Central European markets. Second, Germany has a budding political relationship with Russia, including a solid relationship between Germany's E.ON Ruhrgas and Gazprom. It therefore is unlikely that Berlin will do much to block Gazprom's designs in Greece either. Considering that Germany is expected to have the greatest influence in decisions made by the new privatization agency — and that Berlin's interest is ultimately to get Athens to raise as much cash as possible — Berlin is not likely to stand in the way of Russia and China in Greece.