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Growing state control of the Russian economy: a blessing or a curse?

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The Organization for Economic Co-operation and Development (OECD) and the World Bank, which have recently published their Russian surveys, are alarmed by the growth of state control in the Russian economy. Are their fears justified?

The OECD writes in its "Economic Survey of the Russian Federation 2006" that one of the immediate goals is "to reduce state control and bureaucratic interference in business."

According to the World Bank's "Russian Economic Report #13," Russia should decentralize its economy in order to strengthen the country's competitiveness on international markets.

It is true that the state has been increasingly assuming control of Russia's social and economic development. Three years ago, the Kremlin embraced liberal ideas, advocating market mechanisms and improving the investment climate. Today these efforts have been complemented with a growth of state control over economic assets.

State-controlled companies are taking over more assets in strategic sectors. First Deputy Prime Minister Dmitry Medvedev, board chairman of energy giant Gazprom, recently said the company was negotiating an asset swap deal with Shell on participation in the Sakhalin-II oil and gas project in the Russian Far East, which is being developed under a production sharing agreement. The deal has been on the agenda for a long time, and the talks are expected to be finished soon to mutual satisfaction.

The United Aircraft Building Corporation is being set up in keeping with a presidential decree, and similar holdings are to be established in the nuclear industry, forestry and automobile manufacturing.

There are several reasons for foreign criticism of the Russian authorities' economic exploits. First, they say, the trend contradicts the principles of a free market economy. The Kremlin has rediscovered the formula of state capitalism and is taking over lucrative businesses. Second, the establishment of major state-controlled companies immune to the hazards of competition is not strengthening the competitiveness of the Russian economy. And third, this amounts to a takeover of successful private companies by ineffective state-controlled holdings.

All of these are solid reasons. The growth of a non-market sector in the economy is curtailing competitive opportunities, which makes the Russian economy less stable in the eyes of foreign investors, and therefore affects the investment climate.

However, objective data show that the investment climate is improving in Russia. According to polls, 84% of foreign investors working here describe their businesses as successful and 94% plan to expand.

The Kremlin argues that it is consolidating state assets in order to strengthen the country's international competitiveness, as access to the global markets is almost impossible for companies that are not comparable to multinational corporations.

Some Russian companies working in power generation, metallurgy, military aircraft building, chemistry, and other sectors are using modern technologies and would be able to rival foreign companies if they were incorporated into larger structures. Consolidated companies are to be set up in these sectors to facilitate their advance to the global markets and their competition with world giants.

The state will support initiatives in this sphere, but it is not spreading its control to all sectors. For example, the state was not directly involved in the recent merger of Russian aluminum giants RusAl and Sual with Swiss raw materials provider Glencore.

The current situation in the Russian economy is not ideal, primarily because special conditions are being created for the priority development of some sectors, whereas the state should create equal conditions for all. But what other options does Russia have now that globalization is leaving fewer and fewer vacant niches on the global market?

The country needs innovations and economic diversification; the first steps towards these objectives have been taken, but they cannot be reached overnight. The development of a fully competitive economy will take decades, and Russia cannot allow its standing on the global markets to weaken in the meantime.

The Kremlin has decided that the country must be able to hold its own against foreign rivals at least in some spheres, such as raw materials and metallurgy. Later, when other sectors grow stronger, this experience will help them take a foothold on the global market.

The idea of the state as a very inefficient owner is true only partly. Modern managers capable of working effectively in market conditions stand at the helm of major state-controlled companies in Russia. The task of their companies is to compete on a par with global leaders, which is encouraging them to improve their companies' efficiency and transparency and increase their capitalization.

Russian state-controlled companies are gaining a foothold on global markets. The IPO of oil company Rosneft in London last summer and the forthcoming flotations of foreign trade bank Vneshtorgbank and electricity monopoly RAO UES in 2007 show that Russia is not only creating major state-run companies, but is also offering part of their assets to foreign investors.

As for the argument about Russia's departure from the principle of free market economy, there is no universal model of economic development. Each country is free to decide how deep the state should delve into economic matters. The specific feature of the Russian model is that the growing state involvement in the economy is a response to the anarchy of uncontrolled privatization in the 1990s.

I don't think many people in Russia want to return to that difficult and painful period. This is why a substantial part of them consider the state the guarantor of stability, which can limit, to a degree, the withdrawal of assets abroad and ensure a smooth transition from the redistribution of property to real development of the economy.

Energetic efforts by the state can help strengthen individual sectors and their advance to leading positions. But at the same time the state should not neglect other sectors that are not oriented towards the external market; it should facilitate their modernization and development, so as to eventually ensure comprehensive economic progress.

© RIA Novosti

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