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Russian Authorities Ready to Scale State's Influence on Economy Down Gradually - Kudrin
Interfax - 1.27.12 - JRL 2012-16

DAVOS. Jan 27 (Interfax) - The state can realistically scale its influence on the economy down, partly by divesting its interest in companies, Alexei Kudrin, the country's former finance minister, told reporters on the sidelines of the World Economic Forum in Davos.

High oil prices and sufficient budget revenue currently have a minimal impact on the reduction of the state's presence in the economy. The determining factor will be the political will of the country's leaders, Kudrin said.

"It'll probably even be determined by the course that the future president and prime minister choose, how acutely they feel that this factor (excess state presence in the economy) is a serious one for fostering competition. On the whole I think they are ready to make gradual moves, and the privatization plan that has been announced will be fulfilled," Kudrin said.

Asked whether the government would have enough political will to reduce the state's influence in the economy, Kudrin said privatization was not an "unpopular thing, it's an irritant only to the extreme left." "It shouldn't be hard to carry the privatization out, it's another matter whether the results of privatization will be considered fair, whether there'll be pre-ordained buyers (for shareholders) with state loans." It is this that is worrying the public, Kudrin said. "If we can avoid this, then I think it is entirely realistic," he said.

As for the timing of the privatization, Kudrin warned against rushing things. "It won't be a big deal if it takes a year or two longer, the main thing is that society doesn't lose confidence, that the assets aren't sold at knock-down prices," he said.

"There has been a lot of speculation about funds buying large shareholdings, even Russian companies together with western funds. Of course this has something to do with speculation, and getting something for a low price. I see two risks here: that prices will be low and that these shareholdings will be sold for more at the first opportunity. But we need strategic investors," Kudrin said.

Stats corporations also need to be restructured for the state to reduce its presence in the economy. "This applies to major state companies like Rosneft (RTS: ROSN) and Gazprom (RTS: GAZP), and to Russian Technologies, to VEB," Kudrin said.

Then there is the military-industrial complex, the private sector of which is set to get even smaller because the government investment program there calls for increasing the state's interest in the capital of defense enterprises, he said.

"We need to narrow the subsidies that we allocate from the budget, which is another way of reducing state participation. With this sort of state defense order, private investors would come in with pleasure, but perhaps some work is needed there. An environment needs to be created, a campaign launched, then we would save government money and put this more effectively," Kudrin said.

The state's presence in the economy via technical standards, certification, licensing, permits and applications also needs looking at. "Here, too, I see a transition to another conceptual framework for control and regulation," Kudrin said.

"The state also influences the economy via tariff regulation and prices, starting with energy, housing and utilities - these are enormous spheres that are regulated by the state, not by demand and supply, and competition is not fully functional," Kudrin said.

It could take five-to-eight years to bring about change in this area. "Eastern European countries have done it in five-to-seven years, and we haven't managed in 20. We need to carry a program out calmly for five-to-eight years to avoid any shocks," Kudrin said.

Keywords: Russia, Economy - Russia News - Russia


Prime minister and presidential candidate Vladimir Putin renewed calls for diversification and technological modernization of Russia's economy in an article published today. Short on specifics, Putin stuck close to outgoing president Dmitry Medvedev's pragmatic liberal line. In an apparent effort to conciliate middle class protestors, he sounded contrite about the level of state interference and corruption, and promised reform of state expenditure and the investment climate.

In the article published in business daily Vedomosti January 30, targeted at middle-class readers, Putin outlined his plans to diversify and modernize Russias economy through technology, while improving the business climate and shoring up state finances by reducing corruption.The article is the third in a series, with previous articles tackling domestic politics and foreign policy, and a fourth promised dealing with social issues.

The need for Russia's economy to modernize and diversify is a well-worn theme of the once-and-future president and the only new specifics are targets for technology through 2020, considerably less spectacular than the doubling of GDP Putin promised on becoming president in 2000.

The new targets are for high-tech production to increase by 50% through 2020, with a doubling of hi-tech exports, and for the real average wage to increase over the same period by over 60-70%. More significantly, setting the target date as 2020, however, may indicate Putin intends to run for a second second term following the end of second first term in 2018. This is however unlikely to please the middle-classes who took to the streets in December.

Apparently with the middle classes in mind, Putin again and again defended himself against accusations of state capitalism. He argued that technological modernization required the state to take the initiative in sectors private capital would not enter due to risks. Are we ready to risk Russias future for the sake of purity of economic thought? he asked rhetorically.

He said the aim in creating sectoral holdings called state corporations in 2007-2008 had been to restructure and rationalize state-owned assets and then privatize them. But he acknowledged that the state corporations have not become globally competitive, highly capitalized or even profitable, and the time has come to audit their activity.

Putin acknowledged that Russia's bureaucracy scared off potential investors and promised improvements to the investment climate in the country, referring for the first time to the benchmark World Bank Ease of Doing Business index. He named specifically Kazakhstan at 47th place in the index as an example for Russia to follow, currently languishing at 120. Putin studiously ignored arch-rival Georgias 16th place in the index. He also supported, as he has done before, replacing state regulation with market principles and administrative control with forms of mandatory insurance.

He underlined that upcoming privatization of assets would be for structural reasons, to increase efficiency, not for fiscal reasons. But he also said that nothing would sold on the cheap ignore market conditions. This seems to refer to an ongoing standoff between liberal and statist ministers over whether to proceed with privatization following the downturn in markets in 2011, or to wait for valuations to recover. As ever, Putin appears to be sitting on the fence.

Balancing the budget, tackling corruption

Putin called for a balanced budget and cautious approach to government borrowing. Linking the topics of balancing the budget with tackling corruption, both key middle-class concerns, Putin said he would liquidate kickbacks both on federal and regional levels, and that this would make it possible to cut expenditure by 5% and possibly 10%.

With a nod towards blogger Aleksei Navalnyi, one of his main political challengers who has focused on corruption in the state tender system, Putin said that he would introduce with immediate effect mandatory public discussion including potential participants and journalists - of the terms and starting price of all government tenders worth over $25m. But he did not specify how this would work. Putin reiterated the need to crack down on tax evasion through offshore companies and fly-by-night domestic companies.

Continuing the theme of rationalizing budget spending, Putin called for all budget funding of government services to switch to a per-head principle to stimulate competition between entities. He also made a one-sentence call for a switch to a balanced pension system, without giving any indication of how this might be done short of raising the pension age.

Regarding government revenues, Putin said there would extra taxation on the resource sector where this was feasible thus apparently excluding the already heavily tax oil and gas sectors. He also said there would be new taxes on the rich on prestigious consumption i.e. expensive real estate and cars as well as alcohol and tobacco products.

Between the lines

The article in Vedomosti contained some interesting allusions to past and future events between the lines. In one rare example of a specific reform Putin seems to say that Gazprom will sell its media holding Gazprom Media, which owns TV channel NTV. This may be a nod outgoing president Dmitry Medvedevs initiative to create a freer environment for the media.

Putin also for the first time hinted at the real reasons why oil company Yukos had been privatised and its owner Mikhail Khodorkovsky jailed in 2003-2004.

Explaining his decision to increase the states role in the resources sector in his first term as president, Putin writes, it was not only because some of the oligarchs continued to try directly buying into politics. At the very start of my first presidential term we were confronted with determined efforts to sell off key assets to foreigners. The private ownership of strategic resources by a few individuals meant that within 5-10 years our economy would have been controlled from abroad. With calls for Khodorkvoskys release growing stronger, he seems to be claiming that Khodorkovsky was not jailed for political liberal views, but for deciding to sell off his oil company Yukos to US oil majors.