“Nezavisimaya Gazeta”: “State Corporations: not all the i’s have been dotted”

 
 
 

State corporations have recently engaged the minds of Russian leaders and analysts. There is no consensus about the practicability of continued use of that economic instrument and the measures aimed at improving it.


State corporations have recently engaged the minds of Russian leaders and analysts. There is no consensus about the practicability of continued use of that economic instrument and the measures aimed at improving it.

The concept of "state corporations" (GK) first appeared in the federal law On Non-Commercial Organizations of 1999 which described the GK as a "non-commercial organization established in the RF through the contribution of property and created for the exercise of social, managerial or other socially useful functions." The first swallow was the state corporation the Agency for the Restructuring of Credit Organizations (ARCO) which was formed in 1999 and survived until 2004. In time of crisis the Agency was called upon to rehabilitate the country's banking system, which was in disarray, and is generally thought to have fulfilled its task. The second GK, the Deposit Insurance Agency, was created in 2003.

The process of the creation of state corporations picked up in 2007 when the country had accumulated huge reserve funds and the government decided to invest money in "the development of Russia". In May 2007 major changes were introduced in Russian laws which offered state corporations special powers and special conditions. Within a short space of time there appeared such GKs as the Bank for Development and Foreign Economic Activities (VEB) (May 2007), Rosnanotekh (July, 2007), the Housing and Utilities Reform Fund (July 2007), Olympstroy (October 2007), Rostekhnologii (November, 2007) and Rosatom (December, 2007). In December 2007 President Vladimir Putin also approved the creation of GK Avtodor, proposed by the Transport Ministry, but the bill only reached the State Duma in 2009. It was decided that state corporations had the sole right to dispose of the property transferred to them which ceased to be federal property. GKs cannot be declared bankrupt, are not covered by the general rules of monitoring non-commercial organizations, information disclosure provisions and are not controlled by government bodies, reporting directly to the Russian President.

The size of the assets transferred to the newly-baked GKs was impressive. Rosatom gained possession of 1 trillion roubles, VEB's assets were worth up to 250 billion roubles, those of the Housing and Utilities Reform Fund, 240 billion roubles, of Olympstroy, up to 200 billion roubles, Rosnanotech, 130 billion roubles. Rostekhnologii absorbed Rosoboronexport, the subholding OAO Oboronitelniye Sistemy, the lease company Oboronpromlizing, AvtoVAZ, the Titanium Corporation VSMPO-AVISMA, etc. All told, six GKs received about 2 trillion roubles of state assets in 2007. It amounted to a tectonic shift in our economy.

Joint decision

How did the idea of state corporations arise? The 1990s saw the naïve idea of the all-powerful "invisible hand" of the market tried out in full. The thinking was that we had enough natural advantages in the shape of our huge oil and gas resources. Actually, the USSR had some very good hi-tech sectors: engineering, shipbuilding and aerospace, etc. which, given certain efforts on the part of the state, could have been competitive on the world market. But as a result of market reforms major industrial associations in the country were fragmented whereas in the rest of the world concentration of production and capital was the prevailing trend. Giants can only be challenged by giants. So the stark choice was between scrapping the domestic industry altogether or creating our own "monsters." A systemic decision had to be taken, and it was taken.

State corporations came out of the blue: they had not been included in the Economic Development and Trade Ministry's plans until 2020 or the Finance Ministry's three-year plan while specific bills on creating each individual GK, with the exception of the first two, were discussed under a fast-track procedure (lasting between a month and a month and a half). Yet this was a considered reaction of the authorities to the ongoing process of Russia becoming increasingly stuck in the role of commodity supplier, a process that was accelerated by the "rule of the seven bankers" and the oligarchs in the 1990s, the recognition that "things cannot go on like this" and a logical attempt to turn the economy in the direction of innovation. The authorities finally realised that private capital was reluctant to go into areas that did not promise quick returns. The involvement of private capital does not automatically eliminate the defects in the economy, as witnessed by the automotive and machine-building industries. One high-profile example is Samara's SOK, which squeezed Izhmash dry.

State corporations were created when Vladimir Putin was still the President and he had to exert titanic efforts for the project to see the light of day. He drew the line under the argument about which assets to transfer to Rostekhnologii. Russia came under heavy criticism not only from the International Monetary Fund and the World Bank, but from the leaders of many Western countries. Yet the project was implemented. The current President, Dmitry Medvedev also backed these global transformations. In July 2009 he endorsed the law that created a state company called Russian Automobile Roads (Rosavtodor) charged with developing the network of highways and the road infrastructure. He issued decrees that transferred specific assets to state corporations, including Rosatom and Rostekhnologii. The underlying intent of all these actions is that the sectors assigned to state corporations - ranging from banking, consulting, financial mediation, dealing out of state money, the construction and running of Olympic facilities to the generation of electricity at power nuclear plants, the production of nuclear materials, defence production, aviation and shipbuilding - is to create a new skeleton for the Russian economy. An economy that is more modern in the broad sense of the word and that meets the strategic interests not only of development, but of the historical survival of Russia. All these are laudable goals.

The oligarchs protest

However, the idea of state corporations ran counter to the liberal and economic model leading the liberal-minded experts to the conclusion that the system of GKs was at best state capitalism and at worst a "new feudalism" with its system of "fiefdoms" and a single sovereign.
The charges that Russia was building "state capitalism" were answered by Vladimir Putin at his final press conference back in February 2008: "We will seek, within several years, after major capital investments from the state, after lifting raising technological standard and capitalisation of these companies, to gradually lead them to IPOs to make them part of the market economy... We do not in any case intend to move on to state capitalism."

However, the barrage of criticism of this, the key economic idea of the Putin-Medvedev tandem continued in the press, analytical reports and expert assessments. For some reason these discussions of state corporations often include ungrounded claims that they are out of tax and financial control, are riddled with corruption and, importantly, represent an economic form that contradicts the market spirit.

But let us take a closer look at what is behind this criticism.

Of late one of the most vocal opponents of state corporations has been the Institute of Contemporary Development (InSoR), headed by Igor Yurgens. InSoR has proclaimed itself to be a "factory of reforms" and the "brain centre" of the Russian authorities.

Some of its more important statements are as follows: "the state should have given careful thought to whether we need so many state corporations and how to best use them. At the current stage Rosnano and Rosatom should be given a chance. As regards others, there are hundreds of options: turn them into joint stock companies, sell non-core assets and concentrate on core assets, keep 25% for themselves and sell the rest."

In 2005 the same people, then leaders of the RUIE, said the following: "The authorities should concentrate on the spheres that are critically important for national security and the sectors in which the payback period and the horizon of strategic decisions exceed the potential of private business at present. For example, space exploration, fundamental science and education and the implementation of major infrastructure projects. Private business is prepared to assume responsibility for all the rest. The business community will take the initiative, itself determine growth points which may appear in the most unexpected areas in the process of transition to the innovative approach."

Since then Russian oligarchs have acquired a lot of luxury yachts, private jets, sumptuous seaside villas in various countries and football clubs. "The growth points" have indeed turned out to be rather unexpected, tucked away in offshore zones, but they had nothing to do with the growth of the Russian economy as a whole. One cannot help advising well-connected lobby groups of the oligarchs and transnational companies to "think carefully" how to use best Western practices of state corporations that exist in various shapes in the USA, Brazil, Mexico, Great Britain, Germany, Canada, Italy, Finland, Norway, China, India, South Korea and Japan.

Best practices

The German Development Institute Kreditanstalt fur Wiederaufbau (KfW) which served as a prototype for those who developed the concept of the Russian VEB has been functioning successfully for several decades. VEB in Russia was inspired by the model of a "second tier" bank that does not compete with commercial banks in attracting or investing money and that operates within its own legal framework. The purpose in creating such a special legal framework was to enable VEB to finance large and high-risk projects while maintaining stability due to preferred capitalization mechanisms. This was the model on which the more successful foreign development banks were built, including the German KfW, the Brazilian BNDES, the Development Bank of Japan, the Mexican National Finance Corporation, etc. Incidentally, it was due in large part to the support of the Brazilian Development Bank that the now world famous Brazilian aircraft manufacturer Embraer managed to recover from a prolonged crisis and create the ERJ-145/135 family of jets which has made its name in the world market.

"As far as I can see, in this country state corporations are criticized by the adherents of the liberal market economy, says Alexander Turbanov, Director-General of the Deposit Insurance Agency, one of the first and most successful Russian state corporations. "They argue that this form contradicts the market spirit. But if one takes that view then the USA has long been following a non-market road. It has been using this form for more than 200 years. For us the most vivid example is the Federal Insurance Deposit Corporation created to overcome the aftermath of Great Depression. It set a model for many countries that created deposit insurance systems."

Finmeccanica, a company in which the Italian Government owned 33.73%, was created in 1948, and in 2001 Rostekhnologii was created in Russia along similar lines. "The management system is analogous to ours 95% and the areas of activity are approximately the same," representatives of Rostekhnologii claim. "We have been there and we have seen these enterprises. They are unique and fantastic, built from scratch within two years. The company owns large assets in Britain, the US, Germany and South Africa. It is in fact an international holding company based on the defense industry. BAE Systems in Britain, Thales in France (in which the French Government owns a 27.1% stake) are similar."

Speaking about Rosatom, it is worth recalling that in October 1945 Charles de Gaulle signed a decree on the creation of the Commissariat for Atomic Energy (CEA), a legendary organization that is behind all the French nuclear projects. The nuclear industry in France has always been state-controlled. In 1973 when the Arab oil boycott increased oil prices six-fold, provoking a prolonged crisis in the West, France emerged from the dangerous situation unscathed thanks to the far-sighted decision of its President, prompting de Gaulle's successors - his supporter Giscard d'Estaing and his opponent, Francois Mitterand - to continue the course for "atomisation". In 1974 - 2001 France invested nearly $200 billion in the development of nuclear energy. As a result nuclear energy generation increased by 21 times from 20 to 425 terawatt-hours. Today 59 French reactors provide 78% of France's energy needs, more than in any other country. The CEA has always used the proceeds from the sale of electricity to modernize the sector. While the French are not building new nuclear power plants they are not sitting on their hands: they are developing fourth-generation reactors which are safer and more powerful. And further down the road the French scientists face the challenge of harnessing thermonuclear energy, considered by many to be the answer to humankind's energy problems.

Speaking about the overarching tasks facing Russian state corporations one can look at the successful experience of many years of the Japanese Keiretsu Mitsubishi, Mitsui, Sumitomo, Fuyo and the South Korean Chaebols which took the economies of their countries to soaring heights.

However, the critics in their expert reports refuse even to recall the positive world experience and refuse to acknowledge the early successes of our state corporations. Yet the successes are there and they merit attention.

Early "little-noticed" successes

The scientific council of Rosnano has approved participation in financing the European free electron X-ray laser (European XFEL) project based at the German Elementary Particle Physics Centre DESY. The 3.4 km laser will be installed in an underground tunnel in Hamburg. The total cost of the project is 1.1 billion euro. The XFEL technology traces its origins to Russia: it was developed at the Novosibirsk Nuclear Physics Institute back in the 1980s. The technology generates powerful very short wave X-ray impulses that will make it possible to get 3D structures of a larger number of biomolecules than is possible today. Such models can be used in medicine and the study of materials. Rosnano will represent Russia in the project. The first tranche will amount to 3 billion roubles and the remaining sum is to be disbursed before 2016. In exchange Rosnano will have a share in the non-commercial European XFEL corporation that is being created. The TVEL company recently signed a contract with the Slovak company Elektrostal for building reactors for the local nuclear plant and subsequent supply of nuclear fuel. The value of the contract is about 4 billion euro. America's Westinghouse which took part in the tender, said it was very disappointed with its results. According to a Westinghouse spokesman, the Russian corporation won the tender due to the support of Rosatom which gave TVEL access to cheap uranium and enrichment facilities thus making the Russian offer more attractive.

The Rosatom state corporation signed an agreement with the government of the Kaliningrad Region on building a 5 billion euro Baltic Nuclear Plant located in the Neman district, some 15 km from the Neman River by 2015.

In March 2009 Siemens and Rosatom signed a memorandum of intent to set up a joint venture for the production of nuclear plant equipment after Siemens announced its withdrawal from a joint venture with the French Areva corporation. Experts estimate that this cooperation will win Russia tens of billions of euros worth of orders. Siemens and Rosatom are to sign an agreement on the creation of a JV before this year is out.

The VSMPO-AVISMA corporation recently announced the launching of a joint enterprise with UralBoeingManufacturing (UBM) in Verkhnaya Salda (Sverdlovsk Region). The new state-of-the-art production facility will provide mechanical treatment of titanium parts for the most advanced civil aircraft, Boeing-787 Dreamliner, and for Russian airliners.

Russian arms exports will increase by $700-800 million by the end of 2009. In 2008 Rosoboronexport sold a record $6.75 billion worth of weapons and military equipment. Its order books now contain $27 billion worth of orders. Russia currently supplies weapons and military equipment to 80 countries, with aviation accounting for half of all the exports.

Oblivious of these momentous shifts, liberal experts continue to engage in wishful thinking betraying their desire to destroy state corporations in the interests of the old-style oligarchs. On October 21 President Dmitry Medvedev met the representatives of the Russian Union of Industrialists and Entrepreneurs which discussed, among other things, the fate of state corporations. Some media covering the results of the meeting hastened to report that the president had allegedly proposed to immediately shut down all state corporations (Carthago delenda est). However, if one looks at the transcript of the meeting one finds that Dmitry Medvedev merely agreed with Vladimir Putin's opinion about turning state corporations into joint stock companies which he had expressed in February 2008. What President Dmitry Medvedev actually told the RUIE captains of industry was this: "I am not saying that they should be shut down tomorrow, they will continue to operate. The crisis has shown that all our wishes, for example, to renounce the state's presence, have proved to be unreasonable."

So, one should not be in a hurry to draw final conclusions.

In the context of the economic crisis the huge amounts of budget money allocated to state corporations have caused resentment among the Russian business elite. Ultimately it led Dmitry Medvedev to instruct the government, in his address to the Federal Assembly, to determine its position on the future of state corporations before March 2010. However, even the Russian President's statement that "state corporations are a form that has no future" did not signify the triumph of liberal experts. When the discussion of the issue shifted from theory to practice, it turned out that their quick liquidation, like a change of the legal status and form of ownership, would not solve the structural problems of the Russian economy which most state corporations were designed to solve. Rather, it would create new problems. Problems cannot be solved by changing the form of ownership. Most probably it would merely aggravate the problems.

As for the claims that state companies are out of control and ineffective, these are charges that can be brought against any state or private company. In any case the lion's share of thievery in our economy occurs in the private sector.

It is unclear how a hasty change of the status of state corporations would benefit the budget and the population. The opponents of state corporations have never cited figures and apparently did so deliberately in order to mislead the President. The rhetoric about diminishing the role of the state in the economy in crisis conditions has its price. The head of VEB, Vladimir Dmitriyev, said he would be ready to see his enterprise converted into a joint stock company at any moment, but bringing the activities of VEB in line with banking laws would cost the budget a trillion roubles and three years of work. Finance Minister Alexei Kudrin hastily declared that the 2010 budget has not envisaged the money for such a purpose.

The situation with Rostekhnologii is even more confused. That state corporation effectively performs the functions of an investment bank for more than 400 enterprises, mainly in the defence sector, practically all of which are in dire financial straits. The benefits from the corporation going public for society are not evident, especially if one thinks about the social consequences. The chairman of the State Duma Committee for Economic Policy and Entrepreneurship, Yevgeny Fyodorov, believes that if the company goes public it would mean final loss of Russian technologies and intellectual property in industry.

If Rostekhnologii becomes a joint stock company it will have to live according to ordinary corporate laws. For example, it will no longer be immune to bankruptcy. Practically all the corporation's enterprises owe money to the banks and the new state company will be loss-making. Then, according to market laws, all these enterprises will be shut down and the workers will be thrown out.

The sale of a loss-making enterprise, even for a symbolic price, to an effective private owner can only be welcomed, but in reality the ability and the wish of big Russian business to modernize enterprises are in doubt. The financial and industrial holdings simply have no wherewithal. But for VEB which, by decision of the state, is performing the role of "ambulance" for Russian big business, many private "effective owners" would have faced bankruptcy.

Hasty privatisation, 1990s style, spells losses for the state and leads to corruption. While calling for an early liquidation of state corporations one should remember that business has nothing to offer the enterprises which are part of Rostekhnologii except falling back on the traditional scheme of "making them bankrupt and dividing them up". No new technologies, no investments and no money which business does not have at present.

Now that the President has expressed his final opinion, the reform of state corporations is only a matter of time. One would like to hope that economic and social expediency will dictate the course of action. That would not be easy. The time that the President has given experts for theoretical study of the concrete proposals within public discussions and consultations has been wasted.

The advisors and assistants have failed or have been reluctant to take into account the fact that the new status of state corporations would deter foreign investors. The loans and injections of investments promised during the President's recent visit to the US are unlikely to come through until it becomes clear for whom the investment is destined. And more importantly, who will pay it back? Loans will certainly not be made available to the private sector. God only knows how much of the earlier loans have been stashed away in offshore banks. They run into billions which the Russian economy will sorely miss, at least in the near term.

One has to say that the question of reforming state corporations has provided a convenient opportunity for (basically incompetent) people to promote themselves as being close to the President and claim to be something like a liberal "shadow government."

Alexei Kudrin, addressing the Congress of the Union of Industrialists and Entrepreneurs in April, warned government officials of the dangers of ill-considered populism unsupported by any serious calculations. In his reply to the head of RUIE, Alexander Shokhin, he said: "It is nice to be a liberal, but the liberal approach implies a balanced economy." Otherwise, the consequences may be very serious.

It is too soon yet to discuss how the process of turning state companies into joint stock companies may proceed, it makes sense to wait for the government's proposals. For the moment what we see is little more than an attempt to get rid of an irritating label, because in the short time that has been given to reform the state corporations, only form and not content can be changed.

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Russian oligarchs have a lot more luxury yachts, private jets and sumptuous villas.

Vadim Solovyov