The Role of State Corporations in the Russian Economy
“What is the condition of state capitalism and state corporations in Russia today?” asked Anders Aslund, Senior Fellow, Peterson Institute for International Economics, and former Research Scholar, Kennan Institute at a 1 October 2012 lecture at the Kennan Institute. It is a question made even more relevant by analysts who argue that state capitalism is on the rise throughout the world, and that such a rise would be accelerated by an American withdrawal from the world stage.
There are three criteria for state capitalism: substantial state ownership in enterprises; direct government involvement in those enterprises; and an otherwise capitalist system where most enterprises are privately held and operate in market conditions. Russia meets them all. Aslund noted that the state owns two-thirds of the market capitalization in the Russian stock market. However, that ownership is mainly limited to four industries: energy (oil, gas, and electricity), banks, defense industries, and transportation. There is little state ownership in most other sectors in the Russian economy, including consumer goods, non-defense manufacturing, agriculture, insurance, and services.
According to Aslund, a combination of historical accident and strong insider interests helped shape the current configuration of Russian state capitalism. For example, Russia’s prime minister during much of the 1990s, Viktor Chernomyrdin, came from Gazprom, and he worked to keep the gas industry a state monopoly under his control. The oil industry experienced a significant return to state control with the 2004 confiscation of Yukos assets and their subsequent transfer to state-controlled Rosneft. Russia’s 1998 financial crisis, which caused the collapse of several large private banks, led to a great increase in the state controlled financial institutions because of central bank preference. Russia’s privatization efforts never extended to a number of transportation firms, and transport commonly has government involvement in many other countries, Aslund noted.
Russian state corporations enjoy definite advantages within Russia. They have access to cheap credit (from state-controlled financial institutions) that other companies do not have. They also enjoy an implicit state guarantee for their debts and other activities. Perhaps most importantly, according to Aslund, they function as a mechanism of political control and rent extraction in Putin’s system of vertical power by enriching allies and neutralizing any opposition (such as Yukos’ former owner, Mikhail Khodorkovsky).
The entire system, Aslund contended, has only been possible thanks to a long commodity boom that keeps natural resource prices high and provides the state with the resources necessary to pursue its state capitalism strategy. It is a strategy devoid of ideology—in fact, Putin advocates privatization and not socialism. Instead, the actual government strategy is focused on consolidating, maintaining, and expanding political and economic power for the ruling elites through the control of select industries and enterprises.
There is no pretense of generating economic benefits, Aslund said, and the proof is in the market valuations of the various state controlled enterprises. The average price-earnings ratio (share price divided by net profits per share) on the Standard and Poors index is usually 13. The current average for Russian state corporations is 5.7, and the valuation for the most politicized state enterprises are 2.9 for Gazprom and 1.8 for Transneft. These low valuations, and the size of the enterprises involved, account for the overall low valuation of the entire Russian stock market, Aslund observed.
Despite their low valuations, Russian state corporations are able to succeed and thrive in their own way, and provide rents to the ruling elites, because they are not exposed to competitive pressure. The defense and transport sectors are monopolies. State banks are able to expand at the expense of more efficient private banks because of their access to cheap credits and a de facto state guarantee. Rosneft is still benefiting from the windfall of the confiscated Yukos assets. The outlier among the Russian state corporations, Aslund contended, is now Gazprom.
Gazprom is the now the weakest Russian state corporation because it is exposed to competitive pricing in its exports to the European Union. With the advent of shale gas production in the United States, worldwide liquefied natural gas (LNG) capacity that had been brought online for the U.S. market was freed up to go to Europe. As a consequence, the spot price for natural gas in Europe plummeted and reduced demand for Gazprom’s pipeline gas. Gazprom is suffering from other pressures, including a European anti-trust suit over the company’s differential pricing schemes, which Aslund predicted would end in a defeat for Gazprom. The likely result of these and other pressures over time is that Gazprom’s profits be wiped out, Aslund argued, which will directly affect the Kremlin that relies on rents extracted from the company.
Gazprom could take many steps to improve its position, Aslund suggested, such as shutting down mega-projects, selling off non-core assets, separating transportation from production, and dividing its production into separate medium-sized companies. But none of these actions are likely since they would reduce rent delivery to Kremlin insiders.
Gazprom’s unfolding crisis holds the key for the future of state capitalism in Russia, concluded Aslund. Current trends are placing tremendous pressure on Gazprom, and it will steadily lose its ability to deliver rents to the ruling elites. It would take a large external energy shock, such as a conflagration in Iran, to restore the revenue flow that Gazrpom is steadily losing. Eventually, according to Aslund, “without rents from Gazprom, the Kremlin will have little reason to retain it as a state corporation, and state capitalism itself may dwindle.”
William Pomeranz, Acting Director, Kennan Institute