with Andreas Andrianopoulos, Senior Advisor, Competition Project, Russian Federation; Former Minister of Industry and Energy, Greece; and former Wilson Center Public Policy Scholar
Mr. Andrianopoulos is currently working on a project in Russia in collaboration with the Economic Ministry and the Anti-Monopoly Agency to incorporate more open competition in the Russian market. The topic is quite expansive, and is better understood through the breaking down of factors that contribute significantly to the current status and future implications of the Russian economy.
The project involves advising the Economic Ministry and the Anti-Monopoly Agency in their endeavors to approximate the rules of the European Union with those rules currently existing in Russia in the context of competition and free market ideology. In so doing, he has become immersed in Russian economics and can give direction to the many changing facets of the state. Russia is still in the process of changing from a command economy to a free and open market economy. To a certain extent, Andrianopoulos notes, what is transpiring in Russia may appear a bit unorthodox to the West, himself included, but he believes it is on the right path. Nonetheless the state faces many hurdles that need to be cleared in the next few decades.
One should take into consideration that Russia is growing at a rate of about 6-6.5% annually, surpassed only by China and India. It is becoming a strong and controlled country, with a robust economy, and the state is trying to reinvent itself; during the Yeltsin years, the nation was in disarray – the administration was wrought with corruption. Now there is an organized, recognizable state, and to some degree an over-extending state, which is one of the problems Russia struggles with as it is faced with two possible future directions. The first direction is one of supremacy: Russia is trying and gaining pace in participating in the superpower circle once again, with the belief in the Kremlin that they can return to that supremacy. The other direction is potential decline, as there are still numerous problems and difficulties that may suddenly break onto the surface.
Russia's economy and growth are based on the exporting of raw materials, and the government has tried to concentrate these enterprises into as few hands as possible to ensure stability. To some extent, some of those are government hands, detracting from the idea of a truly efficient free-running economy. In doing this, the Kremlin has managed to accumulate a large amount of money from the sales of energy and raw materials abroad, enabling them to raise the level of welfare for the population. This raised level of welfare has reduced visible suffering considerably, increased public sector salaries and pensions, and there is a discernible middle class forming not just in Moscow, but also throughout Russia.
The raised welfare of society is highly commendable, but concern arises from the fact that all of these benefits are by and large from the sale of raw materials abroad and this subjects the Russian welfare to the global price on commodities. A drastic fall in the price of commodities, i.e. energy, nickel, steel, diamonds, etc., and Russia may face a severe economic crisis. The economic ministers recognize this dilemma, and have publicly called for a diversification of the economy. Basically, they have established two public accounts, the Stabilization Fund, from which they accrue money received from energy and gas sectors, and a designed national budget, which excludes the remittances from energy. The government believes that the two accounts have the potential to counterbalance possible dangers of commodity price dependency.
Mr. Andrianopoulos observes that, so far these accounts have been unsuccessful in sustaining funding. If there is a social problem in Russia, the government is forced to take money out of the Stabilization Fund and feed it into the economy – which in turn has negative economic effects, such as the inflation of the ruble. Goods produced in Russia have become more and more expensive, and inversely imports become more desirable. In consideration of this, there is little interest in setting up manufacturing businesses in Russia, whatever one would produce is going to be more expensive than that which one could import.
Problems with the high level of imported goods are furthered as Russia positions herself, within the next two years, to join the World Trade Organization (WTO). Leaders and civilians are cognizant of the fact that entering the WTO and subsequently opening up trade frontiers would increase the abundance of inexpensive products, flooding in from the EU and all over the world. This would create a greater level of difficulty for Russian industries and small businesses to flourish. Mr. Andrianopoulos spoke at several universities in Russia, and inquired as to how many students were in favor of Russia joining the WTO – and the response was usually fifty-fifty. Those stating they were in favor of entering the organization clarified that it is for purely political reasons that they believe Russia should take the step to join; they are aware, as are those opposed to joining the WTO, of the highly potential economic difficulties that Russia could face.
In recognition of the looming crisis, should commodity prices drop in the public, private and governmental groups, various methods are being devised to counterbalance this unease. One method is trying to implement free competition, something which requires a gargantuan effort in an economy such as Russia's. Around ever corner violations of competition occur, not just in large mergers and formations of cartels, trusts, etc., but also as the small country and city vendors sell all types of products in the streets without paying taxes and without control from authorities. There are places where a Hollywood film can be purchased for three Euros on the street immediately after it's produced in the States. Those who run legitimate film merchandising businesses cannot compete and must close their doors.
Another method is introducing subsidies, while at the same time deferring taxes from certain enterprises that operate in the provinces. During the Soviet period, towns and entire regions were built around enterprises to develop an area, and that industry would be the lifeblood for the population in the region. Now if the government closes down these enterprises, they essentially close down an entire region. If they do not subsidize then a serious social problem will ensue, and thus the government must take action, without loosing sight of the crucial interest of free competition. A law passed in late 2006 stated that for any and all subsidies the approval of the Anti-Monopoly Ministry was required. Those in the Anti-Monopoly Ministry are in a difficult position; for if they look at the issues from a strict economic standpoint the response to those looking for subsidies would always be "no." However, if they take into consideration the social impacts of the products, then they cannot help but agree to subsidize and introduce competition by opening up the market and permitting other companies to enter into various regions and set up shop. Unfortunately, politicization of the economy makes this and other aspects of free competition difficult in Russia.
Politicization of the economy happens in most countries, Andrianopoulos remarked, yet in Russia it is an especially relevant concern. Politicians combine forces to extract benefits for a certain area or certain company for the strategic purpose of gaining the persuasion of those who run the companies, and thus the area and the thousands of voters in those respective areas. This creates concern in properly confronting local and regional administration's attempts to keep them from violating competition in their spheres of authority – difficult when the retorts to the Anti-Monopoly Agency are that the actions are justified by the idea that they are supporting life where it is not easy to do so. This is why the central government has become more involved in middle-level enterprises, enabling the facilitation of competition. The state becoming involved at this level is not harmful, but the problem there lies within the large conglomerates.
In the late 1990s the privatization that occurred in Russia could have been defined more synonymously with corruption than the Western definition of 'privatization.' When Vladimir Putin came into office, he met with many of the oligarchs of the various regions and warned them to remove their hands from the local, regional, and state governments, and to maintain focus on business if they wished to remain successful; he would not interfere with their business, so long as they did not involve themselves with politics. When an announcement was issued that the state would be appointing local governors, instead of holding free elections, the business leaders in the various regions came forward stating they would give thousands of dollars to state ministers who opposed the bill. Though the appointment of governors may seem undemocratic to the West, it was an alternative to having the elections being bought out by the oligarchs, and gave an opportunity for one coherent policy leading out from the center.
There is a concern, Andrianopoulos states, as the conglomerates, namely in energy sectors are returning back into the government hands, something which he and Russian economic ministers acknowledge as economically unadvisable. He cites the example of a development in early March, in which Gasprom decided to purchase a coal-producing company in Siberia, and German Gref, the Minister of Economic Development, came forward and publicly called the move absurd and a throwback to the nineteenth century. An efficiently running economy can not exist if there are merely two or three large companies buying all the assets –now there are members of the government who realize that the accumulation of large assts in the name of the state does not make economical sense.
It is a move that can make sense as far as foreign policy is concerned, and for this Russia has been using its energy powers to dictate policies to its neighbors. Mr. Andrianopoulos notes here that one can not blame Russia for doing so, as any nation with one large asset would do the same and use it to their advantage – Saudi Arabia is one very prominent example. What is a point of potential blame is when they accumulate resources in the name of the government to add to already bloating conglomerates, which are inefficient and inflexible, and do not promote competitions, which may lead to their collapse should the economic environment experience a change.
There are large enterprises in Russia who are investing, not in infrastructure or research and development, but in the purchasing of companies and organizations that have nothing to do with the main field of operation. Gasprom, for example, has recently bought magazine companies, is developing a housing project in St. Petersburg, but is not spending money on infrastructure – and its own think thank has come forward with a study which indicates that if Gasprom does not return to expenditures on infrastructure then in seven years time Russia will have difficulty supplying energy to its own consumers, let alone exporting it to the world. For these reasons, and all those thusly related, Mr. Andrianopoulos reiterated that Russia indeed has valid dreams of supremacy, but it also has considerable fears, and legitimate worries of decline.