#28 - JRL 2006-207 - JRL Home
Russia Profile
September 12, 2006
Championing National Industry
The State Can Play a Meaningful Role in Developing the Economy
Comment by Igor Dines
Igor Dines is the chairman of the Russian State Duma Subcommittee on Information Technology

The support the Russian state provides the major companies, colloquially known as national champions, may appear to be a breach of the principles of a market economy. In fact, it is only a natural result of new realities created by globalization. These challenges sometimes require the updating of old principles, including the principle of unlimited competition. The global market has become increasingly competitive recently and Russia has entered this economy vastly underprepared.

Because Russia’s economy suffered during the second half of the 20th century, the easiest way for Russia genuinely to compete in the world economy is for the government to promote those enterprises that can be competitive. These companies can then work as catalysts to stimulate less developed sectors of the Russian economy.

The idea of the national champions is basically to allow several companies, with government support, to go straight into the market, allowing them to concentrate on international competition instead of wasting time and resources on competition inside Russia.

Creating a champion, however, cannot be done by simply merging big companies and establishing a strict leadership hierarchy. Currently, the only Russian company that enjoys an indisputable leadership in its sphere is Gazprom, and this can be explained by the dynamics of price and the infrastructure of gas extraction in Eurasia. In all other sectors of the global economy, Russian companies are still far from holding leading positions.

In this situation, the strategy of transferring competition from the domestic market to the global one appears to be the most appropriate. Creating internationally known Russian companies must be a priority. The question of whether these companies are private or state owned is of secondary importance.

This policy wasn’t conducted before because the Russian state had different priorities. There were periods in the 1990s when the Russian government desperately needed cash and had to sell off key state assets at discounted prices. Now that the state is much more secure, it can afford to look beyond immediate objectives. The period when whole branches of Russian industry were deliberately fragmented in order to sell them off is over.

There are basically two groups of national champions. The first group, made up of the oil and gas industries, was singled out and developed during the Soviet period. The second group is made up of industries that developed after 1991 thanks to market conditions and the new Russian capitalism, such as telecommunications. It will not be easy to penetrate this market, but it is possible and the very globalization of the market could act as an advantage. There are cases when Russian programmers leave for work in the United States, but at the same time register their own IT companies in India, where conditions for developing this business are very good.

There are various ways the state can support these companies. In 2005, a comprehensive state program aimed at stimulating investment in IT and telecommunications was launched. It includes the establishment of “techno-parks,” which would receive investment funds from both private sources and federal and regional budgets, as well as tax exemptions for companies involved in developing the industry.

There are, of course, some pitfalls to a strong state presence in the economy. The main danger is that the national champions, shielded from home competition by the government, will disregard the domestic market, channeling all their resources to export.

A good example of this is Aeroflot. As the company increases its presence throughout the globe, the prices for domestic flights inside Russia also rise, hurting the Russian tourism industry and creating all sorts of other problems.

At some point, the same kind of problems may appear in the energy sector. Russia will need to develop a reliable system of control, which would prevent the national champions from disregarding the domestic market.

The other danger is a possible conflict of state and private interests within the companies themselves. The risk of state control is that a bureaucrat, unlike a businessman, bears no financial responsibility for his actions.

Despite the numerous problems that lie ahead, it is clear that there is no other way for Russia to survive in a globalized economy but to go global itself. Relying on national champions is a possible solution to the problem, but companies aspiring to national champion status must be held accountable also in Russia. They cannot be competitive on the world market without being useful to their own country. There can be no strong Gazprom in a poor and weak Russia.