Russian state resumes intervention in the economy

MOSCOW. (Dr. Marina Deryabina for RIA Novosti) - The world media have noted the ambition of Russian state-controlled companies to increase their assets.
Energy giants Rosneft, Gazprom and RAO UES are ready to spend billions of dollars on the stakes of private Russian and foreign shareholders in major oil and generating companies.
But this is only part of the government policy of increasing Russia's competitiveness.
The government is resuming control over the development of strategic sectors and their standing on the global market. As of mid-2006, the list of strategic companies included 514 federal state unitary enterprises and 548 joint-stock companies, where the state is the main beneficiary.
The plan for the next several years is to establish 30-40 major holding companies in crucial economic sectors, in which the state will hold at least 50%. In accordance with the presidential decree, the United Aircraft Corporation has been established, and holdings of aviation engines producers, the armor, and possibly power engineering, nuclear, forest and automobile holdings are to be set up soon.
The consolidation of state assets in these holdings can proceed in at least three ways.
One way is to consolidate downstream assets of enterprises and joint-stock companies controlled by the state. The United Aircraft Corporation was set up in this way. The state contributed to its authorized capital stakes in aircraft manufacturing companies where it owns at least 75%. Private owners will provide the remaining 25% (aerospace holding Irkut is so far the only private asset in the holding).
The Federal Agency for Industry proposes that the armor holding should incorporate 20 state-controlled enterprises, including 11 design bureaus and research institutes. After corporatization, shares of these companies will be contributed to the authorized capital of the Armor and Artillery Holding.
Another way is to buy requisite assets at market prices. For example, not only state-controlled nuclear power plants, but also companies that produce equipment for the nuclear energy industry, will be incorporated in the Nuclear Energy Industrial Holding. The state controls part of engineering assets through energy giant Gazprom and electricity monopoly RAO UES.
And the third way is to establish state control of corporations in any sector without buying a controlling stake, but by replacing their management with loyal functionaries. This method was tested in the AvtoVAZ car manufacturer. Its reorganization began with the introduction of delegates from state arms export monopoly Rosoboronexport to the board of directors. After that, the AvtoVAZ Corporate Center was set up to manage the company. The next possible step would be the consolidation of new automobile assets and the transformation of AvtoVAZ into a big automobile holding.
What is the objective? There are two goals in Russia's economic policy: to accelerate economic growth (which was recently formulated as the doubling of GDP), and to increase the global competitiveness of the Russian economy.
In the 1990s, the state was considered a very bad owner, whose property should be reduced drastically, and whose intervention in the economy should be minimized. This view is being revised now. The modern management of large Russian state companies has become an integral part of the market and has learned to work according to its rules.
The state is taking over companies, but this is no longer viewed as a hindrance to the development of a market economy. Moreover, the Russian political and business communities regard the strengthening of state presence in the economy and state assistance to some sectors as a guarantee of their growth and a more stable position on the market.
It would have been difficult to change the form of state intervention in the economy without the second strategic goal. The need to improve the competitiveness of the national economy has given an additional impetus to direct state intervention in nearly all of the basic sectors and industries.
Nobody now questions the importance of higher labor productivity, modernization, and increased investment in fixed assets and personnel skills for developing a market economy.
Everybody agrees that the development of Russia's domestic and external competitiveness is hindered by inadequate protection of ownership rights, an outdated infrastructure, an ineffective judicial system, and excessive political interference in the economy. These factors have brought down Russia's ranking in the Global Competitiveness Report of the World Economic Forum from 53rd position in 2005 to 62nd in 2006.
The solution of these problems calls for considerable efforts and entails the risks and distortions due to "Russian specifics". The so-called administrative resources, which were used in difficult situations to save the planned Soviet economy, can be used again to save Russia. The Russian bureaucratic machinery has surprisingly quickly formulated a new ideology of Russia's progress on the global markets. It stipulates that this goal can be attained only by large corporations comparable to multinationals, or set up by the state, or working according to rules coordinated with the state.
It is important that the state is making efforts to adapt the economy to global competitiveness requirements on a large scale. In addition to the consolidation of state assets described above, the government is trying to reinforce the standing of Russian companies on the world markets.
Last September, the European Aeronautic Defense and Space Company (EADS) officially confirmed that Russian state-controlled Vneshtorgbank (VTB) had bought more than 5% in the concern. The VTB makes no secret of its intention to increase its share in the European concern to 10%.
The state-controlled United Aircraft Corporation plans to buy out VTB's shares in EADS and to increase them to a blocking stake. If it wins the right to sit on the concern's management bodies, the integration of European and Russian aircraft industries, which the Russian government is lobbying, will be complete.
Russia's natural monopolies, the main envoys of the Russian state on the global markets, are growing stronger and more diversified. Gazprom's policy provides for getting a foothold in European gas distribution networks, while RAO UES is eyeing energy assets in adjacent countries and other regions, where it is buying stakes in generating companies.
The results of the Russian government's policy on the domestic and foreign markets are so far uncertain. Stronger economic intervention of the state can make good quite a few negative consequences of the policy advocated in the first 10 years of the reforms. In particular, it can help Russia regain its leading positions in many sectors.
But the price may turn out to be excessive. The young Russian market is being forcefully removed from the invigorating influence of competition, and the inertia of a monopoly-based economy may become uncontrollable.
Marina Deryabina is a doctor of economics and a leading researcher at the Institute of Economics, the Russian Academy of Sciences.