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REMARKS BY CHRISTOF RUEHL, CHIEF ECONOMIST OF THE WORLD BANK'S RUSSIA COUNTRY OFFICE, ON CURRENT ECONOMIC SITUATION IN RUSSIA
( FULL TEXT )
[WORLD BANK'S RUSSIA COUNTRY OFFICE, 12:17, APRIL 7, 2004]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)

Schweitzer: Sorry to keep you waiting a few minutes. We had a minor technical problem we were trying to sort out, like finding a computer for the presentation.

First of all, let me just introduce the topic. This paper which we have distributed to you today in draft is a draft of a report which is part of our regular reporting which we do on all countries. It's called Country Economic Memoranda. In fact, we haven't done one for a long time in Russia. Although we've done, as you know, lots of reporting on different topics, we have not done a more comprehensive report for quite two years. And we felt that five years after the meltdown of 1998 this was a good time to step back and take a look at some of the structural changes which have taken place or might be taking place in Russia now to see how these are likely to determine future growth prospects.

Christof will talk in detail in a moment, so I am not going to discuss the report. But I want it to just mention to you all that we are distributing this to you too now because in the nature of these reports when we try in the World Bank now to have as wide as possible discussion early on when we prepare these reports. So, we can ensure that to the extent we can we take into account different views and sources of information. And I know that various earlier versions of this report have already started to circulate as a result of this.

So, I wanted to be sure that you got hold a fairly advanced copy now so you knew what we were actually saying rather than what people might think we were saying. But this is not the final version, it may still go through a few final changes when we receive your comments. And so please bear with us on that.

Let me also just say that as some of you know I'll be leaving Russia fairly soon now, about the end of next week. So, this may be almost the last time I have the pleasure of participating in these press conferences. I want to say it's always been a pleasure to talk to you. I've always enjoyed the discussions and on the whole I've also enjoyed the reporting we've done. So, with that, without further ado, let me turn this over to Christof.

Ruehl: This is funny, usually I have the problem that I am talking too much and now I have to bridge some time until these pictures come up. So, let me start by things which we can say without any pictures, which is what the topic of this report is all about.

As you know, one of the priorities of the President is to have as rapid economic growth as possible, and we have discussed many times to what extent it depends on oil and to what extent it depends on other things. But you also know one of the priorities for the Minister of Economy has been to diversify the economy to lower this oil dependency.

And normally when we do one of these country reports Julian has just mentioned we cover the whole country, we look at the economy of the entire country and look at the last two, three, four years and discuss it. We found that Russia is too big for this and the economy is a little bit too complicated to do this. So, we decided to concentrate on one particular aspect of Russia's economy. And that particular aspect is the contribution of structural change to economic growth. So, in other words, if you want to be technical, you could say economic growth depends on -- and then you have a long list of things. You can say, on oil, of course, oil and gas, it depends on population growth, technological change and it depends on structural change.

And then we go on, we say, keep everything else constant, we don't look at oil, we don't look at technology and so on, we only look at these aspects, how it can contribute to growth. Without denying that there are other aspects.

And that's the first step. Then the second step, if you do something like this, you are in very uncharted waters because different people understand different things when they hear structural change. So, it requires us to be very precise in defining what we mean by structural change. So, what we do when we define structural change is we concentrate on five different areas which all have to do with the particular structure of Russia's economy, and then we try to compare how it looks compared to other countries and we try to see how it will develop.

The first of these areas is the fact, not very often discussed, but economically very important, that Russia has a population which is distributed across the country in an arbitrary way which is different from almost any other country, at least any other country I know of. And this, of course, has to do with the socialist period when cities were founded in Siberia and organization took place by putting people into cities where there shouldn't be any cities essentially for economic reasons. And what we observe now is massive population movements both back from the cities, but also out of the country and inside of the country. That's the first point.

One of the things that will drive these population movements is where people find jobs. So, the second thing we look at is how people move across how the economy changes, how they move across different sectors, where the new jobs are generated.

The third thing we look at is how that contributes to growth. Is it movements across sectors or is it restructuring within sectors, and I'll explain it in a second, which contributes to growth.

And the fourth thing is, given that we think it's more likely to be restructuring within sectors. And the fifth is the structure of ownership in the economy.

So, what I wanted to say is that the fifth part has to do with the concentration of ownership in Russia's economy. Why? Because it's important for restructuring. And I'll walk you through the last three of these parts to see the whole argument and then introduce to you some of the results we got when we looked at this particular question.

Here is the first and initial question. As you know, Russia has been extremely successful after the crisis. GDP has grown by about 38-39 percent cumulatively since the crisis. However, employment has improved much less, only by about 4 percent. So, this was a period of rapid growth, but essentially it was a period of jobless growth, as the Americans would call it. And so the first question -- I am leaving out this part about people being in the wrong places -- the first question to ask them is what happened to all these people? Here, this difference -- what happened to it? We've seen massive changes in employment across sectors as well, but what happened to these people? The first answer of course is there was huge underutilized capacity after the crisis, including people who had jobs and they didn't really work in them. So when demand started and output started to grow, they stayed at the same place and found employment, and so you have more variations in output than in employment because of underutilized capacity. But what we wanted to know is what happened then? Do these people all sit around and do nothing, or did they do this for all these years or did they find a way now of producing much more efficiently, without changing their jobs and so on.

Then if you look at this question, the first answer is of course aggregate employment may have stayed fairly constant, but there were a huge shifts of people across different jobs and different sectors. So, while unemployment stayed aggregate more or less like this you can already see in this picture, so people shifted a lot between different sectors. And in order to investigate this problem we did the following: We distinguished between three main sectors of the economy -- agriculture, industry and services -- and then we looked at the rest of the world. Here you have an example. All these little stars stand for other countries, and what you have on the horizontal axis is per capita income, to make these countries comparable. And what you have on the vertical axis is simply the share of employment in a particular sector. Here it's agriculture. And you see how all the rest of the world looks like, and you see how Russia looks like. And you see that Russia has this shift from the right to the left which just reflects the fact that in the 1990s income declined, GDP declined right? So, you moved into a low per capita income.

But we also see that, as a share of employment, agriculture did not very much change in Russia. So, in agriculture as an example Russia has less people. Why? Because it is a cold country, because there is much gray economy in agriculture and so on. And it didn't not change very much.

But if we look at other examples, you'll see there are actually substantial changes. Again this little black dot, this is Russia, and it starts out in 1991 in all these pictures, and it ends up in 2002. And what you can see is the red line is the share of employment in industry across the world in countries comparable with Russia, because they have comparable per capita income. And, well, you see how Russia behaves. It starts out with a vastly overindustrialized share of employment, which then comes down substantially. Again the movement from the right to the left is only because GDP declined. What matters is the movement from top down.

So there is massive adjustment in terms of agriculture. There is also massive adjustment in terms of services, in particular if you look at market services. We are making a distinction, though, between market services, which is the private sector, and government services. In market services, not surprisingly, in 1991 Russia starts out much below the rest of the world and then makes a large adjustment over the next ten years, and it's now even a little higher than the rest of the world.

So, again very massive adjustment, good news in the sense of becoming more like other countries of similar income levels.

And there is the third one. That's only one problem area. If we now distinguish services, these are non-market services which are government services, essentially public sector employment. You see that Russia starts out of course under socialism much higher than comparable countries, but you also see there wasn't much downsizing, there wasn't much adjustment.

In fact over the last one or two years it has grown, and people have seen, these people have seen that public sector employment went up. And very often you read in papers and so on that, and you hear people saying that this is because the number of bureaucracies increased. We looked at this question and it's not true. The reason for this increase in public sector employment and non-market services is mostly that poor regions are hiring people who would otherwise be unemployed. So, the number of bureaucrats in Moscow and outside has actually declined over the last ten years. By the number of people on the public payroll has gone up, because poor regions hire them as street cleaners, as janitors, as hospital workers and so on. And because their poor sometimes can't even pay the wages. They turn around to Moscow and ask for transfer payments and they usually get them in this age of high oil prices and high fiscal reserves. They get this transfer money and employ people who then stay on low paid public service jobs.

So, this is a potential problem building up. But by and large we see big adjustments in two main sectors: industry and market services. And we see a big problem building up in non-market services, the state sector.

Now one of the beauties of Powerpoint is that one can play around with it and I will show you very quickly how massive this adjustment was. Here the same picture as before, and again this orange line is the rest of the world. But now you have two other lines and they just reflect the regression, the average for 1991 and 2002. And these black dots are Russia's richness. So, we now looked, instead of the entire country, at the richness, and you see how they jumped.

And if you do this for industry, you see again the rest of the world and then Russia's richness was an average in 1991 and the blue line is for 2000. You see how the richness downscaled. You jumped out of employment which left the industrial sector.

Q: ... (inaudible)...

Ruehl: You are free to interrupt me if you have any questions. So, here the line is what the status was in 1991, the purple line ... (off mike) ... you see the share of employment in industry over ten years falling very rapidly.

And when you look at market services, you start out with the share of market services very low, and you see it increasing towards the rest of the world very rapidly. And if you look at non-market services, at the state sector, that's where the problem is, you see it starting out too high, above the red line which is the rest of the world, and then jumping even higher.

So, the movement in non-market services is away from the rest of the world and it goes into a direction that will not be sustainable. It is not now sustainable because of high oil revenues.

Well, if you want to have an adjusted description, you know some oil producing countries who can afford this kind of structural composition -- Kuwait or Saudi Arabia -- they are very few people, and you can have some of them working, producing ... (off mike) ... and they just get transfer payments. But in Russia this is not feasible. You can't do this with 144 million people, and this is why there is a tendency which cannot go on for ever. It already moved a lot in the wrong direction. But it cannot be sustained.

Starting from this, we then asked the question: Okay, we have these massive adjustments and we have some problems there. the next question is: what does that mean for growth? These people who are moving from mostly services into ... from industry into services, are they increasing their productivity and is this good for economic growth? Or is it better for economic growth that restructuring takes place within sectors, within industry.

In order to investigate this question, of course you need precise information, in particular you need information about the composition of the economy: how many people are in industry, how many people are in services and what share of GDP do they produce, how productive are they? And this why we did something: we looked at the official numbers and then decided to make reassessment of the way they are compiled.

Because in Russia when you look at the statistics you have a phenomenon: you see that oil and gas is only 8 percent of GDP. And the reason for this, very briefly, is transfer pricing. You have a lots of companies who have one subsidiary which produces oil, gas and other things, then sells it to another subsidiary which is trading company, who on-sells it to the market at market prices. And they do this so that the profits go to the trading company. Why? Everybody knows. Because mostly these trading companies are in some far away regions and they get tax breaks. Or trading companies just exist for a year or two and they then disappear and don't pay any taxes at all. This process is so massive that it actually affects national accounts.

And I want to say something at this point, because when we publicized this earlier, a lot of people were very quick in blaming Goskomstat for this phenomenon. And this is, of course, not the right address. Goskomstat just uses the figures that are given by these enterprises. There's a problem with corporate governance in Russia and that is what distorts the national accounts. It is not that the statistical agency is doing something strange to the numbers, I want to make it very clear.

But what one has to do essentially is to go back to these tables to recalculate it and we did this by comparing the situation in Russia and the profit margins in Russia with other countries. I don't need to go into details. Whether you compare it with Norway or Canada or the UK or any other country, the result is always very similar. The true contribution of oil and gas to the GDP is about 20 percent, not the official 8 percent.

And as a consequence, the share of industry in GDP was up, of which oil and gas is a part, and the share of services, of which the trade sector and trading companies are a part, goes down. Now, adjusting for these numbers we can now go and ask this question: is it more important for growth, for productivity that people switch across sectors or is restructuring within sectors, particularly within industry, more important?

The answer to the question is that in Russia currently it is still more important that restructuring within sectors, within industry takes place. The reason is a very simple one. The reason is that in Russia, like in other countries by now, industry has higher labor productivity. So, what you see here is the purple line with this gray here -- this is industry labor productivity, and the red line is market services. And you see that initially they both moved very much together until about 1995-96, and now industry is becoming much more productive and market service is becoming less productive.

This is not only because of oil and gas. It's important to understand that this is an entirely normal development. In any market economy of the world labor productivity in industry, which is very capital-intensive, is higher than in market services. And what happened in Russia was that initially -- just picture this, there is some old used rusty factory and one guy goes out to New York to start a kiosk and starts to sell vodka. Initially he will make a lot of money. So, initially his productivity will be very high. But as more people leave this factory, the productivity and his profits will go down in the service sector and the factory will become more productive. And this is what you see here in 1995-96 when they start to diverge and you see productivity in industry going up, productivity in services going down.

So, you have this complicated picture: people go into the service sector because there is demand and that's okay, but the productivity is still more driven by whatever restructuring takes place in industry. That raises the next question. We know a lot about small business growth and service sectoral growth and people opening kiosks and so on, but what drives restructuring in industry?

This is a big issue we have to talk about. And we know that restructuring industry in all former socialist countries has these two sides. One side is that new firms will be created and they will be more productive and they will generate employment and so on. And this does take place in Russia to some extent. It's actually very interesting that in the year 2001-2002 most new jobs in Russia they came not from very small enterprises. Instead they came from enterprises with people between 30 and 100. Here. This is the growth rate of new jobs. And all these tables you will find in the report, there is a table here which gives you numbers and shows to what extent employment grew in different enterprises.

So, there is some good news here in the sense that enterprises have become more sizable, they are now small and they start to become mid-sized companies and grow. But that's of course, not the only side which is to restructuring.

The other driving force of industrial restructuring is what happens to these old enterprises. And here is where we come to the first, I think, really interesting finding which we confirmed by the data. When you ask this question, how does industrial restructuring work? And you ask anyone in Russia -- politician, no offense, or a journalist or any layman and you ask him, what's the problem in our industry?, the usual answer will be that they all say, your industry has too many large factories, it's overconcentrated. And if I would ask you this, if Russia's industry is more or less concentrated than in America, you would answer yes, it's more concentrated. And people mean by this that there are two many large production units, too many big plants and factories, physical locations with too many people.

It's clear why this is the case, because it comes from central planning. If you are a central planner, you don't want to have 32 tire factories, you want to have one big one, it's easier and cheaper to control. The funny thing is that if you ask the very same question to an academic who has all the numbers and you ask, is Russia very concentrated in terms of the size of its factories?, they'll get a very good look at these numbers and say, no, it's actually very fragmented, they would say we've more companies than other countries.

And so this is a very puzzling picture. We looked at this and who was right? The answer is, both are right. And it's a very specific Russian thing that comes from history. If you look at the production units, the single plants and factories, how they are distributed across the country, it is true that Russia has too many of those. We call it establishments just to distinguish them from firms, which is a legal entity.

This is a comparison with the US, but you could do it with any country. Here you have the factories in which people are working, the establishments by size. If you look at the left column, black is the US and the other columns are Russia between 1995 and now. Look at the left and you see that the US has more small factories, firms, enterprises than Russia. That's clear because they have more small and medium enterprises.

The interesting part of this picture is the right side. At the right side you see factories and enterprises which are larger than 2,500 people and you see that still now, even though downscaling takes place, Russia employs many more people in these big factories than the US. And you can see over the year how the share has declined in Russia, so, downsizing takes place, but there are still many more people in this sector of huge enterprises than in the US. And this is what everybody sees when he travels across the country and so on and this is why the common opinion and perception is, it's overconcentrated.

But if you go one step further and you ask yourself the same question and you look at firms, and what I mean by firms are simply the legal entities, not the physical locations, factories, then you get a completely different picture. Okay, look at the left side again. Not surprisingly, the US has more small firms, bigger small and medium enterprise sector, we knew this for years.

But look at the right side. Black is again the United States and there is Russia. And what you can see very clearly is that many more people work in firms which have more than 10,000 people in the US than is the case in Russia.

Now, how do we explain this? The explanation is very simple. The explanation comes from history, in particular from privatization. Russia starts out with these huge factories, then privatization comes and the way privatization in Russia was carried out is that essentially each factory was sold to its management, in most cases. And so you end up with a lot, and each factory became a single firm. So, you end up with these big units, but these are not single firms. There is still today very few units in Russia which could claim to be similar to Siemens or GE or big multi-plant firms. They are very rare in Russia.

This is important because now, coming back to the question how does restructuring reflect in the industrial sector, now you see that restructuring really has two dimensions in Russia. There is one dimension which is that obviously these large production units, the downsizing of them, has to continue. I mean if the experience of any other country is any guide then there's too many people there and this process will continue. There is economic pressure to downsizing of these production units.

But then secondly there's also huge incentives and rewards and therefore economic pressure towards consolidation, towards mergers and acquisitions and towards these firms merging with each other by all sorts of means. They can buy each other, they can merge, they can do whatever to become larger firms.

The picture is very simple. You have a city and you have three barbers' shops, or three bookstores, and each one has been privatized, given to its own employment. In any case, there will be huge economic rewards by merging them into one firm, into the organization that will have sales, advertising and ordering together. These are economic rewards, and therefore it is justified to say that there is huge economic pressure towards consolidation on the firm level.

And again, the two dimensions are that firms are the little constructs, so there is pressure towards consolidation at the firm level, and it seems to me that this consolidation is the precondition for getting active downsizing on the factory level started.

Now, again, I can tell you a lot of things, so, in order to avoid this test, we looked at what actually has happened. This is Russian markets, and it's a concentration measure. All these dots are different markets. Here you have cars, tobacco, fish, whatever, different product markets. Here you have market size, on the horizontal axis, just simply measured by sales. And on the vertical axis you have a concentration measure. The vertical axis here tells you how much of that particular market is controlled by the four biggest companies. So, for example, you see on top - there is gas and electricity, completely concentrated, that's RAO UES and Gazprom. And this is the picture from 1991. And then you see down here there are breweries, distilleries, confectionery, things that are not concentrated at all. This is how it looked in 1991.

Now, if you look what has happened over the next 10, 11, 12 years, you get the following picture. You see - this is the beauty of PowerPoint - you see it jumping up. Concentration increases in almost all sectors. Now, look at some of them. We started out with monopolies, gas and electricity. If I fast-forward ten years later, gas is still a monopoly, but electricity actually is one of the few sectors which has come down. Why? Because by now many people have installed their own power generators, and they don't want to rely on RAO UES any more.

Perhaps, that's an exception, but if I look at any other sectors, and I'd like to point out some of them, it's going to be aluminum, and cars, and metals. Aluminum is here, cars are somewhere here, metals - ferrous - here, and also somewhere in the middle. In '91 - not very concentrated. Now, a jump up, and you see aluminum right up there, metals here, cars there, and I think you all know why these sectors are particularly concentrated.

So, what you observe, again, overall - because of this particular privatization history, and this need to downsize - so, let's step back -- productivity gains come from restructuring industry, which really involves downsizing, not only new firm creation. Because of this particular privatization history, there is massive pressure for consolidation of firms, of legal entities, to carry out this downsizing.

When you look at the last ten years, you see it actually happening, you see in almost any product market in Russia a tendency towards higher concentration.

And now the last question that we wanted to ask, or we had to ask after this, was, Who is doing this? Who is most likely to drive this process of consolidation and downsizing? And looking at those sectors which have jumped the most, like aluminum and cars and so, you already have half of the answer. There have been built up a large number of large, huge industrial groups, or financial- industrial groups, who have the means to actually implement the downsizing.

And so, this is how we arrived at this fourth point of our report and looking at the concentration of ownership in Russia because now the logical question to ask is, OK, we know we have these big groups. But some people tell us, they are necessary because they will have consolidation and, therefore, restructuring. You talk to any investment banker and he says, Aha, this is very good because they will restructure, and so on. And some people tell us, no, these groups are actually very bad because they are so powerful and so big not for economic reasons, but only because in an environment with legal uncertainties and institutions not very well developed you get non-economic rewards for being big. In other words, if you are big and powerful, you can bribe local officials, you can buy your way out of trouble, and so on. There are rewards to size which have nothing to do with economics.

And so, there are two very extreme opinions among normal people and also, of course, among economists. And there is one opinion saying this is dangerous because this kind of concentration which we have in Russia will block growth, because these people will just shut out the competition and will avoid competition, and that is dangerous. There is the other opinion which says, no, these people have the means and the investment means in order to speed up this process. Nobody else has these investment funds. Therefore, they need to consolidate as much as possible because they are the forces of change, they are the ones who downsize and restructure, and they are the ones propelling the economy forward in terms of productivity.

And now, of course, the funny part is if you try to answer these questions and try to form your own opinion, there is no way you can do it because there is absolutely now way in which you could find out how concentrated Russia's economy actually is. That was the problem we bumped up against last summer.

Coming from this very economic and very un-ideological question: how is it, actually, the Russian economy, how concentrated is it?

In most countries, in my country, you go to a bookstore and you look at a factory and there is a book, an official record of who owns what, in Germany in this case. And you can look who owns the store, and who owns this factory, who owns the owner, and so on, it's not a secret. You try the same here - and you are journalists, you know it much better than me - you'll end up with Moonshine Inc. in Cyprus, and then you go to Cyprus, even if you do that, you end up with Sunshine Inc. in Nassau, Bahamas, or something. You will not be able to find information in an official way.

So, what we did was - I'll describe this to you very briefly - we built a team, and we hired actually some of your colleagues, to whom we are enormously grateful, and some of them are here today, and we defined the largest companies in the country, we developed a little questionnaire, which was essentially trying to find out, who owns these companies, and what is owned or controlled by these companies. And then we tried to tap all available sources of information. Your colleagues helped us a great deal. We sent some people to investment banks, we asked all the sector analysts, and luckily the investment bankers - because we were no competition they would talk to them and they would grant it anonymity and they made their sector analysts speak to our people - so we told these are not journalists, these are consultants from the World Bank. We went to insurance companies, we went to banks, and tried to get a bigger picture, which was aiming at finding out, tracing the size of production units to the ultimate owners through these different layers of ownership and so on.

I have to say, when we did this, we started with sending people with the questionnaire to ask everybody in a discreet manner. I was very skeptical. We started out with a list of less than 300 companies.

It developed very well, cooperation was very large, and people - I mean it turned out that everybody, banks and private people and others, were interested in getting this information. They just couldn't for competition reasons usually work together, so, when it was coming from an outside force like the World Bank, they worked together.

It turned out that instead of the 300 companies, we actually ended up having information about 1,300 companies, probably, the biggest companies in Russia. And different from previous attempts, we had companies which were listed companies, and not listed companies, and service sector companies, and industrial companies. There are two other exercises that have been done - one, I think, two years ago by Peter Boon (sp?) at UBS Brunswick, who looked at 60 industrial companies that were listed on the stock market, and one, fairly recently, done by Mr. Dinkin (sp.?), who looked at a larger number of companies, but many of them were actually intermediaries.

Compared to this, we think we have a very solid sample of firms with the information relating them to the top, ultimate owners. And I have to say something else at this point, which is, we got told, and rightly so, by those who did the investigation with us that in many cases the notion of ownership was misleading, or was at least not very informative. What people were willing to say or to guess was, this guy controls this company. But the formal ownership relations, of course, are mostly behind closed doors, and if they are open, they are not always meaningful. So, what I would like to point out is that this sample which I am going to introduce to you is not an accurate description of who owns what in the summer of 2003. Rather you should understand it as the best effort available to what the market thinks who controlled what and who owns what. And I am using owning and controlling interchangeably.

So, because we got all this information from the marketplace, we can say the market is always right and we can say that the common perception of the market participants in the summer of 2003 expected the following picture. And so we have these service companies and then we traced their ownership.

Now I am going to walk you through this quickly and then we can open it up for discussion.

We were coming from this question here, this intriguing picture of consolidation in Russia, interested in asking three questions. The first question is, how concentrated is Russia's economy? This is the observed situation that it's one of the biggest countries on Earth and nobody knows how concentrated its economy is.

The second question we asked, we wanted to have an answer to is, whatever the concentration of Russia is, what does it mean for economic performance? And the key issue is as big as can be good because they can invest. And as big as can be dangerous because they can lock out competition. And we wanted to know, how does it look actually in Russia?

And the third question is, what actually does the existence of large industrial financial groups mean for this borderline between the state and private business? Again, looking at it very unemotionally because we know that not only in Russia -- Russia is completely normal in this respect -- but in Brazil, in Indonesia, in China, in India huge companies have often reasons to be big which are not rooted in economics. It's not that they have better production facilities, it is because size gives you influence. And so we wanted to see how does it influence the economy.

How concentrated is Russia actually? What does it mean for economic performance of the big owners versus the small owners? And what does it mean for the relationship between the big owners, the small owners and the state?

This is a table that you can't read but you'll find it here. Just to show how large actually is the sample. It tells you what employment and sales, we have assets for banks, we have sales for industry and we have sales and employment for the other factors in the economy. By sector, we choose big sectors, by sector in industry we cover about 50 percent of all of Russia's industries. And if we look by employment actually in our sample, then we can say that of all employment in Russia's industry we have got 17 percent in the companies in our sample. If we do the same by sales, we can say the covered sectors which we looked at are about 77 percent of Russia's industry and the actual companies which we have are almost 60 percent of Russia's industry. So, it is really a sizable sample.

Then let me give you some overall picture first. The first thing which we did was we tried to find out, is Russia concentrated in this sense of having a large segment of private owners. And I put this out upfront so there's no second guessing. What we did was we said, we want to see who in the sample controls more than a quarter percentage of total sales and who in the sample controls more than half a percentage of total employment? And we assume that this is a cut-off point. We assume that above this cut-off point there are some really big groups.

And here you have a list again which you find in there which tells you by sales and by employment the largest private owners. To make the answer short, the answer is yes, we do have an identifiable group of about 23 large private owners and their business groups who control more than these cut-off points of the total employment and the total sales in the economy and who can therefore be justifiably called large owners or owners of significant importance and so on.

Another little footnote at this place. We do not refer to them as oligarchs and I don't want to be understood to put the name oligarchs in here. I saw it still on some of the slides which is because they are old. But this is important. We've been talking a lot with Russian economists and sociable people and of course as you all know this is now a politically contentious area. We are not interested in politics, but the notion of oligarch is very negative. People when they say oligarch, they mean some thief and some whatever you define him.

In this list there are some people who have some history and there are some people who have a history of investing, European entrepreneurs. In order to avoid any judgment call, we just call them large owners or big business or nationally significant owners. Take your pick. But we don't want to get... We want to exclude value judgment as much as possible.

So, back to the question how concentrated is Russia. The first answer is, if you do this cut-off point, we can identify a group of 23 individuals and their businesses who qualify as nationally significant owners. Actually there are no surprises here. If you look at this list, you will see that all of these businesses and all of these individual factories have been discussed numerous times, have been very outspoken and very public. It's not that we discovered someone who wasn't there before or that we had a big surprise of someone who should be there or should not be there.

What this list tells you is the total employment and the total sales which can be attributed to these individuals in brackets and then the holding companies or basic institutions, organizations controlled by these individuals. And when you study this quietly then you will see that most of them are active in sectors where you have quite sizable employment and quite sizable sales figures.

Now, in terms of our sample, this gives you the total composition of it, but this is total industry, this is the total industrial sectors covered, this is not the sample. This is the sample. About 35 percent of sales and a little bit more, 37 percent of employment, are controlled by these 23 groups of over 1,300 companies.

Then you have yellow, which is other private owners, and then you have a large chunk -- federal government -- to the right and you have regional government (purple) to the left, and you have also foreign owners here. So, in the aggregate this is how the sample looks like. Now what I have to say is two things for you to understand how big the share is in fact.

If we were prophets and we would have chosen a completely representative sample, then you could translate this one to one and you could say, this is not only how our sample looks like, this is how the economy looks like. But we may not be perfect. And particularly, we have not covered many firms and services, market services because they were very small. So, it is likely that the truth is somewhere in-between.

The second thing I should say to our defense is, all these people for whom we have no data, are assumed to be not controlled by this group of large owners. So, if this is how our sample looks like, then this is how total industry looks like by our sectors. Now you see to the left our sample, the firms in our sample which we have covered. And to the right you see all the other firms. Now it's easy to see if we assume that all the other firms are small private firms, then we can say at least 17 percent of employment and 33 percent or some 34 percent of sales are controlled by these 23 large owners.

And the reason I am saying this to you in such detail is that this of course is our lower bound. This is the absolute minimum of what they control because they may, in fact, control a lot of these other firms which are not in our sample. So, if you want to get a feel for the numbers, the truth may be somewhere between our samples being perfectly applicable to the whole economy and actually this sample of industry, where we have our sample covering of industry, not all of it, and those non-covered sectors are likely to have a lots of non-big owners in them.

So, the first point, on aggregate we can say Russia's economy in comparison is very concentrated. Somewhere on the scale of 30 percent, 25 to 30 percent perhaps of employment.

But the really interesting things comes now when you look at how this actually plays out. This is the sector of distribution of concentration, and what we will see now is that this concentration issue is completely unequal across sectors. The red are all the big owners and blue is everybody else -- government, private, unknown, foreigner, everything.

And there on the left side you have the sectors and on the other side you have the percentage of employment and ... (off mike)... they are set to control. And what you can see is that there are sectors where you have no control visible at all of these large business groups, which are essentially run by small fragmented firms as we could see in numbers before.

And then you see some sectors which are run by these large business groups, some of them almost entirely. What's the difference between those sectors? The first difference is that they do tend to ... (inaudible)... in large sectors. The second is that they tend to target sectors which have large companies. And the third is that they are more profitable sectors than non-profitable sectors.

What I mean you can look it up in the report again, they are in the strategic sectors: raw materials, steel, iron, aluminum, the car sector. So, they are in upstream sectors which are large, profitable and comprised big companies.

The thing is that these sectors ... (inaudible) ... by ownership is something I saw very late. It's true not only for these large owners, but also as you will see in the second, also for other categories of owners, this is if we add the government, now government is both regional and federal to keep it simple -- interestingly, they move together most of the time. Again you see in some sectors very little government activity, and it's taken over by either big owners like the natural resources sector in Russia or by the small guys like much of the furniture, bakeries, vodka production and so on, non-alcoholic drinks.

But then there are key sectors where the government concentrates its intervention, and obviously this is gas and pipelines and transport. And also things like rubber, tires and electricity. Well, very often the federal government and the regional government operate together. We cannot tell if this is because they can't agree who owns this factory or they always come together when it's not privatized, some form of arrangement. But it's clear that they move very much together.

So, some key sectors are still controlled by the government, and also the government has concentrated in a few sectors.

Now another category -- foreigners, foreign owners. Also very concentrated per sector. It's really striking. This economy is not mixed at all. Like an organism, it's very separate from each other.

What do foreigners control? A few sectors which all have two things in common. They are all final consumption goods like beer, cigarettes, soft drinks -- this usually means that you have goods which can be differentiated very easily. If you close your eyes, you cannot really tell if it's Coca Cola or Pepsi Cola. So, therefore, secondly, these are sectors where brand names are very important. And these are the sectors where foreigners concentrate because they do have brand names, so they are here in non-alcoholic drinks, in tobacco, in beer, in confectioneries and so on. Where brand names matters for sales.

So, you have a picture of large domestic owners and groups, upstream strategic sectors and on the average the government is somewhere in between, and foreign investors taking over those final consumption goods, when you just basically have to control one factory and then you put your name on it and you have a competitive advantage.

But the main point is, the second point is -- the first point, yes, Russia's economy in the aggregate is very concentrated. Secondly, this concentration is very very uneven across sectors. It does not really makes sense to talk about concentration in Russia. You have to be specific which sector you are talking about.

This is just the entire picture of how colorful it is: blue is small private owners, red is large groups and then yellow is the government. And now you see ... Sorry, what I said before government is gray and purple, regional and federal, how they move together in some sectors.

So, this is the first answer to how concentrated Russia's economy is, to the first question. There is some more observations here. This shows you, what I said before, that big owners -- again they should not be called oligarchy, I apologize for this -- how they control large industries.

Here you have, as before, a measure of size of these different markets for chemicals, oil. It's the same once we look at it as it's consolidating. Now big owners control more of the large ones, of the large industries and the small owners just the other way round. The control more of the ... Sorry, the concentration of ownership is declining as the sector's size increases. That's for the small owners. And for the big owners it's increasing with the sector's size. The larger the sector, the higher the concentration.

Another interesting experiment is if you say Russia's very concentrated. But how does it look like. This gives you sort of the distribution of ownership rights. It tells you that taking all owners together -- and this includes the federal government, includes regional governments, and includes foreigners, everybody together -- you see that the top five owners in the economy or especially the top ten owners controls a large part of the entire economy. Top five numbers are there, in the picture -- something about 20 percent. Top ten is, I think, in the 40 percent range.

And what happens is that the biggest owner here is the federal government. And already among the top five owners is a regional government. And among the top ten owners there are more regional governments. So substantial ownership rights are still controlled by government.

Now one more thing you can look at -- when you asked this question on ownership and control, remember I used the term interchangeable because we can't really distinguish. There is however another database at Mr. Gaidar's institute which looks at ownership strictly speaking of voting shares in companies. And merging these two, our observations and their observations leaves you a subsample of companies which are in both samples. It's interesting when you do this. It gives you a measure of the voting shares the biggest owner in a company has. That's strictly legal ownership. And here it gives you all the measure, what people say the control the biggest owner has. It's fascinating. There are lots of people who have very very little voting shares, but a lot of control. If ownership and control would be exactly lock stepped, then you would move along the 45 degree line. Everybody above has more control than ownership. Everybody below has less control than ownership.

So, this is some of this information which we have here. And that would sum up the first part -- an industry or an economy which is subject to control by twenty something nation wide groups, who own about 30 percent of the total employment, and an extremely strong diversification of who controls what across sectors and very steep distribution of the importance of different owners, with the federal government right on top of it and with the regional governments still playing a sizable role. That's the answer to the first question: how concentrated is Russia?

Then we moved to the second question. And the second question, if you recall, was, now what does this mean for economic performance? And here you have to have a word of caution. You have to decide on whether they are more productive or less productive than the small ones. But of course these are very very tricky questions because first of all they involve time. There is a big problem because normally you could argue -- for example, if you would measure that large owners are performing worse than small owners at any point in time, you could argue that this is because they buy the worse companies, because there they have more gains from restructuring.

So if you only look at this point in time, of course you will look as if they have bad companies. But the truth is that they have bad companies only because they reform and they will restructure them. To find the truth, I'd say, you would have to look at what happens over time. And if it happens only once, we cannot look at what happens over time.

There are other things. You have to adjust for size and for -- whether they are in the energy sector or very productive sector or not. We did the best we could with this. And people here I think are probably some of the most experienced people we have in Russia. We worked with Sati Guryev (sp.) and Katya Zhirovskaya (sp.) from CEFIR and the New Economic School on this.

All I want to say we did as much as we could to adjust the data so that we eliminate differences between industries of size and so on and so forth. But still you have to look at it with caution. Our hope is this database will be continued next year and so on and that we could -- and we will make it available to Russian researchers and then hope that somebody replicates this exercise so that after three or four years, just like we did with the small database for CEFIR, after three or four years one has a time series and has a way of looking at developments over time. But right now we don't have it.

So let me come to the results. Again you cannot see this here. Read it. The investigation has three results in terms of economic performance. Number one. We do not find any reason in the data which would indicate that the large owners performance better than the small owners. In many respects, and especially if one excludes energy sectors and so on, they do perform worse than small owners. However, both, large owners and financial-industrial groups, and small owners, and also of course foreigners, they all perform much better than government-owned companies.

So what we have is a hierarchy. We have regional and federal government companies, and then we have -- which are the worst, and then we have private owners and there is, to put it mildly, no indication that the big owners perform better than other owners. There are indications, some indication that they actually perform worse, and particularly outside energy. Then we have the foreigners who clearly outperform all of the other categories. The foreign investors are the most productive.

I should also tell you how we measure this. We measure sales growth, we measure labor productivity, we measure labor productivity over time by just looking at the companies, and we measure profits out of sales. In the data which we use there is another problem because this data, sales growth and all of this, is available only for 2001. So we have the ownership composition of 2003 and the data from 2001. It's unavoidable. But the share of company that actually changed ownership in those two years in-between is small. So it's not a big distortion.

That's the first result: they don't perform better. The second result: they perform better than the government. So, it's better to have financial-industrial groups than the government, but they did not perform as well as foreigners. And the third result is also interesting and it relates to investment. As one would expect, the large private firms invest a lot more than the small private firms. The investment rates overall of these financial-industrial groups between 24 and 31 percent higher than those for smaller owners.

The way to read this table, if you look at it in the publications, you have the different groups of owners on the left side and small domestic owners are the benchmark. And the numbers tell you how much above and below that benchmark these owners are. So you see large domestic -- 0.30 means 30 percent more investment than the smaller ones. And the stars just show you whether it's significant or not. But again --

The third point is that they invest between 24 and 31 percent more than small owners. And only foreign owners have such high investment rates. However, there is a big difference between foreign owners and these large domestic groups, which is when you take out energy, the energy sector, than the investment rates of the large guys are almost the same as of the small domestic owners. So they are not longer 30 percent better, they are just 8 percent better which is a little. For foreigners this is not the case. Foreigners' investment rates are large inside and outside the energy sectors.

So these are the three main results: a) they do not perform, the big guys do not perform better than the small businesses, at least at least in the state sector; b) both outperform the state sector while foreign investors are still more profitable, productive; and c) the big owners invest a lot more than small owners, but most of that investment goes into energy.

So much for performance. Now the third question you wanted to ask us, how does this impact the relationship between large businesses and the state because what comes out of this performance is one side of the coin. That side is the investment side. Really it tells you they have huge investments, so this is good from the economic perspective and the growth perspective. Investments rates are 30 percent more, that's what you want.

Now, in order to approach the third question, we matched again this database which we had with the data maintained at CEFIR. That database at CEFIR measures all regulations and legislation issued by all 89 regions in Russia over the last 10 years. And it pinpoints every time such regulation mentions a company and gives some preferential treatment to a company and tries to take that as a measure to which companies get preferential treatment, so if legislation says that company X does not have to pay its taxes because it is special economic zone, company Y does not have to pay its electricity bills because it's producing some strategic goods and things like that, this will be recorded in the legislation.

Then to use this to identify which groups of owners are influential in what regions. There is some literature on this of course which comes under this heading of State Capture which measures how companies get influence on the regions. Normally, this literature comes to the following conclusion. It says, yes, it exists, big companies have influence on regions, and if they do, then they get preferential treatment, it's good for them. But usually other companies in the regions pay a price for that, they suffer from lack of competition and so on.

And the overall result of this one company being better off and the others being disadvantaged is that the economic performance overall is worse. That's the standard theory. We did exactly this approach. We looked at what happened in the region if we can see that these guys got preferential treatment. But we asked a different question for the first time, which is the question: for this process, for this story that I just told you, does it matter who owns the companies, who get the preferential treatment? Does it matter if it's foreigners who get preferential treatment, or if it large industrial groups or if it's small owners, regional companies and so on?

And the short answer is -- two answers. First, when you look at who gets preferential treatment across Russian regions, most likely to get preferential treatment are regional companies, foreigners, and state-owned companies. Least likely to get preferential treatment are large private owners and small private owners. That is somewhat surprising, right? It is not the case that these 23 groups have control over all of Russian regions or so. They actually look very -- this is actually I think what we observe. There are some regions where they are very powerful, and there are some regions where you almost have a fight, and it's not a fight between big and small, it's a fight between regional firms and regional authorities and federal firms and federal authorities. That's comes out in the picture.

And the second answer is when they get preferential treatment, in those regions where they have succeeded to get preferential treatment, the benefits from this to the companies are largest for big companies and foreigners and are smallest for regional companies and for small private companies. And the damage to other companies in the region is biggest if either foreigners or the large groups get preferential treatment. It's a bit complicated, right? So the first answer is, overall the big financial-industrial groups get less preferential treatment in regions than other groups, especially than state-owned companies. Secondly, wherever they get preferential treatment, they are much more efficiently using it, and the negative impact this has for the activity and the sales and the growth of other companies in this region is much higher if those large industrial groups do it, then if regional or state-owned companies do it, and some of the middle or small private companies do it.

So that I think is sort of a comprehensive answer to these three questions, very concentrated, yes, with these subdivisions, economic performance not better but investment much higher, and government problems -- with government as you would expect are also present, and wherever they have succeeded to put their mark on it, they have succeeded very much.

One more sentence and I'll finish. What is the conclusion from all of this? I'll try to bring out sort of implicitly that these big companies have a dark side and a positive side. The bright side is present in Russia. They have the potential to consolidate and invest. And the dark side is also present in Russia. They have the potential to slow down growth by distorting competition, by colluding with each other or with the state and so on.

What we think was following from this is that the economic debate will get stirred up. For a long time now, the World Bank and economists and the government, everybody has agreed how important it is for a country like Russia to help small firms to grow and to come into existence at all, to generate conditions for entry, to remove administrative barriers, to take the state off the back of these small businesses to let them grow. And nothing has been wrong. I mean this is perfectly still true. It's just that by now everybody knows that, and the government and everybody else talks about it and nobody seriously doubts it any more.

There is however, another side to maintaining competition in a healthy economy, which is represented in these large groups. Once you find yourself in a situation where you have problems of concentration, one needs to have an effective competition policy. Everybody has it. Germany has it. Mr. Monti in the European Union. There is the Federal Trade Commission in the US. And they are very powerful agencies. They do maintain competitive rules, which are binding for all, big firms and small firms, public firms and private firms.

And what they do is to make sure that monopolization, price negotiations, collusion with firms or with the government do not take place and do not distort competition. So they protect competition. This is very important, and Russia does not have that at the moment. In many instances in Russia you can say that laws are very good but implementation is bad. In this instance the laws are bad and outfashioned and outdated. So the whole thing needs to be introduced: laws and their implementation. I doubt that it's very complicated, but you need to start talking about it because what we hope to do with this report is have a public debate, which is so important for these issues.

There was a big success over the last 10 years but now everybody agrees that one needs to help small enterprises, that this is good for a country. And one has to start talking in a non- emotional and non-politicized way also about the rules of the game which bind large businesses and to protect competition and to get closer to installing such competition policies.

This after all is -- many here compare the situation with the US at the beginning of the 20th century when you had these big groups: Standard Oil, Rockefeller, J.P.Morgan, all of this. This is what happened there. There were very effective court rulings, legislation which actually reigned in the power of some of these groups. And that made it possible for smaller ones to grow into the niches and that made it possible for the country to grow as it has over the last 150 years or so. And something similar I think is called for here. And that would be the one clear result of this exercise. Thank you.

Moderator: Thank you, your questions now, please.

Q: Could you once again tell us the figures (inaudible)...

Ruehl: Do you mean the individual one or the aggregate?

Q: (Off mike.)

Ruehl: So this is the sample. About 35 percent of sales, labor more than 38 percent -- I think, I forgot the number. They are in there -- of employment controlled by large private owners. Then the second big group is the federal government which you can see here to the right. And the third biggest group in the sample is smaller owners. And then you have federal -- you have some production facilities for which we did not manage to get data. And you have foreigners.

In general, what we did is that we collected not just firms in sectors, which we hope would not be specifically concentrated, and then tried to apply a proportionate rule. It would tell us that this shoe factory is controlled by Mr. X and Mr. Y, each to 50 percent. We would then allocate the employment of the that shoe factory or the sales of that shoe factory, 50 percent to Mr. X and 50 percent to Mr. Y and then we would look at what else do they control and who controls them and this way chase up this chance until we ended up with a small number of groups.

Q: Thank you for your excellent presentation. But I was made think that one of the (inaudible)... The problem of poor legislation and poor enforcement what legislation raised. I think that is crucial. But what I am concerned with is that you actually said that you were not interested in politics (inaudible)... I don't see how this report can have real weight because it does not have at least an appendix referring to the current political situation. I know you reviewed a number of years but since you stopped collecting data for this the political situation in Russia has changed significantly: virtually there is a one-party Duma, a president with more powers than any of the Russian or Soviet leaders had since Stalin, the KGB in control of the country. We have seen this week the trial of Mr. Sutyagin, which I think is a very significant political moment in the life of the country. Are you ignoring the political side?

Ruehl: Let me just use the occasion to clarify what we are doing. We produce information partly because you are right it's a jigsaw puzzle, so we try to help solve it by producing some pieces of information. That's an example. We also produce economic advice on what to do to improve the economic situation. We are called the International Bank for Reconstruction and Development. So that's our business: improving the economic situation.

Of the report which we are issuing you will find two types. You will find that it also deals with specific problems and gives economic advice on how the pension reform should be done, what are the economic consequences of HIV, whatever. And you find sometimes, occasionally we have something more substantial. This is something more substantial. I would call it more like a research report.

So we will take this report out for discussion, we will make it available for those who are also interested in solving the jigsaw puzzle, mostly for Russian researchers. For example this data base of which we talked will be made available to Russian researchers and they will be running with it. We are not in the business of getting engaged in the public policy debates. It's not our job, it's not what we are paid for and that's why we stayed away from this policy debate. It's not necessary. I am an economist and I have an economic thing to look at, and that's what I do. And that's all there is to it. And we don't answer any questions on qualities in the sense you define it.

Q: (A lot of people ?) say that it's not necessary. It reminds me of when I was --

Ruehl: (Off mike)

Q: No, but I'm curious as to how you can avoid -- in your position how you can avoid the situation. It reminds me of when I was a student an economist is someone who sees something happening in practice and then tries to work out a way back and prove it. And I think it if you ignore the political side in doing all these calculations, then you've got a huge hole in your jigsaw puzzle.

Ruehl: Well, you can study economics, but anyway, the next gentleman. Yes?

Q: (Off mike).

Ruehl: On the first question, just to clarify this. This is 35 percent of the sample. In the report for all of you there is a table. It's this table here. It's called "Sectoral Sample Coverage". It gives you on the left side the totals for the economy, for subsectors by employment, by sales and for banking and assets. And then it gives you the different rows: total economy, the sectors which are covered by our companies, sectors which we choose and then we put here another column, "The Surveyed Firms", what percentage of the sectors there which we choose and what percentage of the economy by these different sectors are.

So, without spending half an hour on it now it's actually very detailed in there. You can get for any sector and any measure, employment or sales, you can calculate a 6.4 million unemployed and we have 3.3 million in the sample and then you just divide. So, here you also have the sectors and you have total economy. So it's all there.

Q: (Off-mike).

Ruehl: You see, what you are really asking is how representative is the sample. You haven't been following properly. Right? You have a sample which looks like this and these are certain sectors and companies in certain sectors. We try to choose the sectors not by concentration but by importance for the economy. We chose the companies by size. Now, the question is, is that going to be a fair representation of the economy as a whole or not? Part of the answer -- and this is why I included this one in the report -- is this is for industry the other extreme. This is all the companies we do not have in the sample versus all the companies we have in the sample. So, you can say that as a minimum of the industrial sector, so and so much of sales and so and so much of employment is controlled by these different owners. Because the rest we don't have in the sample.

And now the truth is somewhere in the middle because these are not sort of flying in the sky, these are companies that are also owned by one of these groups and to some extent it will be also owned by the large firms.

Let me give you some other piece of information. We discussed this transfer pricing problem. Here is something very interesting because when we first started this survey, we knew very little about how significant transfer pricing is. So, therefore we included very few trading companies because we thought they are small, they are not likely to be part of one of these big holdings. A little bit we know that of course some of them doing this transfer pricing will have enormous profitability and will have profits which should actually to the big holdings of which they are a part. To that extent, these companies to the extent that we didn't include them, escape us. So, concentration is underestimated by that number of firms we are just assuming here that they are not part of the largest group, and it's underestimated by the fact that we don't take explicit account of transfer pricing which is important especially for these large groups and especially for the energy sectors.

But we can't take them into account because we cannot chase company by company. So, it's underestimated by those to extents. And then there is a third source of potential error which is that the employment and the sales data are older than the ownership data. It's unavoidable, and as I said, the number of firms which switched ownership in that period is very little. So, we don't think it's a big distortion. But those are the main sources. And when you look at this picture the likelihood is that it's underestimated. The other picture is slightly overestimated. So, the truth is somewhere in the middle.

Q: So is there a headline figure at the end that people can understand? I'm just trying to understand how we can give this information out because we're going to be asked "23 companies on how much --"

Ruehl: I mean, we're not pinning it on a number, but the realistic figure would be somewhere around 30 percent, a little less than 30 percent.

Q: (Off mike)

Ruehl: Well, a little less than that. And you want the headline figures, just say -- you know, you take the numbers of the sample, you can say that X percent of the sample is controlled. Remember this other study which had the headline figure that the biggest, I think, 8 or 6 control 80 percent of the economy. They took that figure as percentage of their sample. So, if you want to do this, then you use that figure here, which I think is 34 or 38 percent of the sample is controlled by the largest groups.

Q: Part of the research is devoted to the structure of regional employment, and the process of creating public sector jobs. Could you elaborate on the link between the phenomena and how important it is?

Ruehl: So, the basic story is a very simple one. It is that if one looks at the service sector in general and then ask yourself how many people move in or out of that particular sector, one sees that the service sector in general is attracting most new jobs in Russia. They are created there. But then if one makes a distinction between market services, which are actually private, and government or non- market services, one can say that the movement in market services is very much a movement towards what you observe in other countries. So again if you have other countries and Russia, Russian regions, you start out from the position of 10 years ago when Russia had very few people in every region working in this market service sector.

And then you see this big jump as people move towards that sector. That's positive because it's self-sustained. At the same time, however, we see that in the non-market services something similar takes place except the initial position is such that Russia has more people working in the market services, this is health care, education, communal services and so on.

And one would expect therefore Russia to downsize that sector and people move out of it and to other sectors. Instead what has happened is that more people are moving into the sector. So almost, as you can see, in some regions about 50 percent of the people are working in the non-market sector, being essentially receivers of government salaries.

Now the same development is visible in another statistic which is -- this is a labor force survey. It's very precise. The best we have actually. But there is also the normal official statistics from Goskomstat, and what they tell you is that the number of -- they don't distinguish market and non-market services -- they tell you that the number of public employees has increased.

People look at this and say, it's terrible, we have more bureaucrats. They associate public employees with more people in the government buildings and so on. The fact is that the number of executive people in government services has declined over these 10 years by about 10 percent. The number which has increased is mostly people hired on the regional level and mostly they have been hired for low-wage jobs: janitors, street cleaners and so on, hospital workers. And if one asks why is this happening, the answer is clear because these are poor regions, they have been thrown out of work, sometimes they are very qualified people, they lost their jobs in factories and so on. And because there is no adequate social safety net, the region offers them some sort of employment, usually at a minimum salary.

Over the last few years, as you know, especially the minimum salaries in public service have increased a lot and they are paid on time now. And some of these regions actually did not have the funds to pay them, and in order to avoid running up arrears, they asked for federal transfers. The federation budget has the financial reserve which is not very transparently handled, it's fair to say. And so some of these transfers have taken place and provided these employments.

Why is this a problem? I think it's a problem for two reasons. One is that this is what people, like Mr. Illarionov, are always happy about. It is true that the state expands and does not shrink in those areas. So the first problem is it is moving towards levels which are sustainable only if you have the money for very large transfers. And the second is, it's of course a terrible process in the long run for those involved because there are many workers from factories, engineers, high school people who then instead of having the opportunity to move outside and try something new are stuck in their locations for probably a long period and have no future. And they are stuck with employment which is very low paid which is losing their skills and they are accumulating -- creating a potential problem if 5 or 10 years from now these transfers are not there any more, because the money is not there any more.

And so that's why one should be worried about it for this social problem which is building up and also for the budgetary problem.

Q: Two questions. First of all, these 35 percent in total that are controlled by 23 large business groups. As you compare that internationally, is that little or much? Is Russia particularly concentrated in the international comparison?

Second, I am surprised that these large finance groups obviously do underperform in the non-energy sector, their profitability -- even if they have capital, they always say that this sector is lacking capital. I would have expected them to be a driving force in concentration. So do you have any further indication of what happened? Don't they do anything or what's the problem?

Ruehl: This is a good question. The first one, international comparison, which is very hard to find a comparable database for other countries does not exist. The reason is that the only data which we have across countries, and we have asked everybody in this field, the reason is that the only data which exist in a variety of countries is data of listed companies, companies quoted on this stock market, which of course gives you a very selective sample.

If we take our data and if you take the data by Peter Bulens (sp.) who published two years ago, and we compare -- we take out the companies listed on the stock market, there is a paper which compares this type of data across countries and what it does is that it looks at the ten largest families and asks how much of the stock market listed companies are owned across countries by the 10 largest families. At the top of the list there is Indonesia where the figure was 58 percent. Some South Asian companies like Taiwan, Thailand are in the middle of the 20 or 30 percent range. Japan, the US, these countries are in the 2 to 3 percent range.

If you replicate this exercise for Russia, it is about 60 percent. So it is more concentrated, slightly more concentrated than the most concentrated of these countries which were known so far. Russia is about 60 percent controlled by the 10 biggest owners of again the listed companies. That's the only comparison we have among stock market listed companies. From that perspective it looks large.

From the other literature as in economic history, how it was in the US 120 years ago and all of this, looking at that, it also looked very large but I would be very hesitant to plug numbers on it.

Your second question is why would large owners not perform better? There is an awkward -- there is a daring answer and there is an awkward answer. The awkward answer is one could of course think that it has to do with problems of in our sample, in particular with the fact that we have only -- I have to remind you -- one observation at one point in time.

So someone defending large owners would have to say, okay, these guys, they buy the most rotten and the least productive companies precisely because they are so good at restructuring them. So when you measure it only at one point in time, you have adverse selection, as it's called. You see them having a lot of bad companies because they are not interested in buying good companies.

Now anecdotal evidence when you look around we suggest that this is not very serious. I think they are interested in buying the best companies not the worst companies. But theoretically you cannot exclude it.

The other, more daring but also I think more plausible, answer has to do with the structure of the rest of the private sector, something that I have not mentioned but which is extremely interesting. Another result of privatization, the positive result is that the ownership concentration within firms -- how many owners control individual firms -- is extremely high in Russia. We have a box on this in the sample.

When you talk in economic terms, then you have -- one problem is concentration of ownership in companies. So how many people own a shoe factory? The standard argument is that if it is concentrated, it's good because it's a complicated company, somebody has to control it. If it is diversified, people can't control it.

And this is different from ownership on the national level. So if you look at the other private sector, concentration ratios in Russia of private firms are in the 80 percent range. The only other country which has such high concentrated ownership within countries of which we reviewed is Germany, which is the highest -- which has been regarded so far as the highest and the most concentrated country in the world as far as control of individual companies is concerned.

So this part of the answer would say that yes, these large groups have more investment and therefore they will acquire more of other companies and do much more acquisitions. But actually that just means they expand their empires. The other private firms are already so concentrated and so efficient that as a performance measure they perform better. It may not be possible for them to acquire the same amount of other firms and they are much slower because they don't have the investment funds. But whatever they do take over, they turn around at least as efficiently as the large companies.

So you would have a bookstore that acquires another bookstore, and this would happen every three years but it will immediately increase productivity, and then you may have a large owner who acquires 10 bookstores but who is not better at improving the productivity of these 10 bookstores. That's the story. And I think this is more plausible because I think this is really significant. But as a result of this insider privatization, those ruthless methods, for better or worse, it worked that ownership of individual companies is really concentrated and that is efficient.

Q: I wonder how you account for the practical absence of foreign companies in the most heavily concentrated sectors and how competitive they can be if the market were to be more open?

Ruehl: You mean in the small sectors, in trade sectors? Which sectors?

Q: Practically in all the 23 sectors you spoke about foreign companies are absent.

Ruehl: I think it shows you that this is an economy where the past, the way in which it was privatized, it starts really in 1992 at some fixed point in time which usually you don't have in economics. This is not a grown economy. At this point and how it was privatized, how different sectors were privatized is still very much visible. So, I am convinced if you would look at this picture which shows you that the different ownership categories are very concentrated on specific sectors, if you would look at this picture 20 years from now, hopefully, it will be much more mixed. This very much shows you that some people had an advantage in privatizing large energy and natural resource sectors. And of course, 15 out of these 23 are not the same people necessarily, but in one way or another related, for example, to loans-for-shares privatization. It did have an impact in these big sectors.

And in the other sectors privatization was much more directly to the people working than to the owners. And it also shows you, we may suspect that it shows you that sectors are open to foreign investment to different degrees. I think this is true as everybody knows especially for the early period for the natural resource sectors. But it's not the only explanation why foreigners are so concentrated. There is also the explanation that foreigners are cautious and it's for them the easiest to go downstream to take one of these sectors where little investment in financial means and technology results in huge quantity jumps.

My favorite example is all those fruit juices. It's something everybody knows. It was there in the Soviet times, it was just of lousy quantity. Now, somebody comes along and with very little investment actually and very little technology generates a huge quality jump for a product which everybody knows. And all of a sudden everybody starts buying domestic fruit juices. Before that everybody was importing fruit juices. It is not a matter of foreign or not foreign, it is a matter of taking it safe to make an investment and improving something that is very well known and then marketing it.

And here is where foreigners have an advantage, they have an incentive because the investments are not so high as in the initial sectors and they have an advantage because they have these brand names. People are more likely to buy something which they know from TV and so on.

Q: You are saying that basically companies that are owned that have a high concentration ownership are actually more efficient and more competitive than the actual bigger groups, the FIGs. Is that one of the conclusions of your report? Can you clarify that? And also that they use investments in a more efficient way or that they have a higher productivity. You talk about what the government could be doing in terms of anti-trust legislation. Are there any specific recommendations that you would make to the government in the sense of breaking up these big groups or preventing them being created in the future. What kind of recommendation could you make to the government?

Ruehl: On the first question I'll try to be very cautious and the difference in economic performance. These are the tables that you should look at here. Firms controlled by large owners do not outperform. And then you have the different measures. The difference is very small and not always significant. That's why I always said, they don't perform better. The point here about ownership concentration is more that the private sector as a whole outperforms very clearly the state sector and for me that has to do with the fact that also the small private owners perform very well because they have concentrated ownership.

We know of a couple of examples in developing countries where ownership is widespread even for small countries as companies and then they immediately develop problems.

Now as to your second question, I think it's too early yet to come up with any precise recommendations. We did this and we haven't publicized it because we think this is something which has to be discussed and it is discussed right now mostly not in economic terms. And I think this is a subject which lends itself easily to an economic discussion and it's these kinds of discussions which we want to support. As I've said, we have discussed this report already with a number of Russian economists and we will continue to do so and I hope that then some of the more obvious steps come out of the discussion and some of the more obvious steps are that Russia will not be forever the only country which lives without clear rules safeguarding competition.

And right now it's just a matter of fact they are slightly outdated and so that's the discussion which one has to have and it's not up to us to say do this or that. That's what we are trying to do.

Q: It's on food business. It's not exactly true that the fruit juices are doing quite well. The second question. When you talk about Russian regions, are you referring to the 89 subjects of the federation? You were showing us the slide for 2001. Where is Moscow here?

Ruehl: I promise I'll look it up.

Moderator: Thank you very much.