#1The New Role of State Corporations in the Russian Economy Anders Åslund Senior Fellow Peterson Institute for International Economics Kennan Institute, October 1, 2012#2• What Is State Capitalism? Substantial state ownership of major companies • Direct government intervention in these corporations Basically a capitalist system with market relations and private ownership of most enterprises#3Russian State Capitalism Two-thirds of stock market capitalization. Mainly four industries: 1. Oil (50%), gas (75%) & electricity (Gazprom, Rosneft & Rushydro) 2. Banks (Sberbank &VTB, VEB, Agroprombank & Gazprombank) (60% state) 3. Defense Industry (Russian Technology, United Shipyards, United Aircraft & Rosatom) 4. Transportation (Russian Railways, Transneft, Rostelecom & Federal Grid)#4Private Sectors Most industries are almost completely private: • Retail trade and restaurants • Consumer Services • Non-defense manufacturing • Construction Agriculture Mining • Metallurgy • Mobile phones Insurance#5• Why Are Companies State-Owned? Gazprom: PM Chernomyrdin defended his old clientele • Rosneft: Yukos confiscation in 2004 • Banks: Gerashchenko's preference for state banks after August 1998 Transportation: Privatization never went that far#6Why Are Companies State-Owned? (2) 1. Remnants of state socialism - never privatized 2. Strong state managers opted for state ownership (Chernomyrdin, Gerashchenko & Sechin) 3. Putin's policy of state capitalism, 2004-8, aiming at political control and rent extraction 4. Access to cheap state funds and implicit state guarantees 5. Caused by long commodity boom (high oil and gas prices)#7Why Are Companies State-Owned? (3) Motives: 1. Political control (Putin) 2. Rent extraction by the state & cronies 3. Strong self-interest of state managers Not motives: 1. No socialist ideology. Putin has preached privatization and capitalism 2. No pretense of economic benefit#8Poor Company Valuation Company Market Price/Earnings Capitalization Gazprom Sberbank Rosneft $120 bn 2.9 $65 bn 6.4 $60 bn 5.2 VTB Transneft Rostelecom Federal Grid $18 bn 5.0 $10.3 bn 1.8 $10.2 bn 9.1 $8.6 bn 6.5 Source: Troika Dialog, September 2012#9How Are State Companies Faring? • Many are secure monopolies and to exposed to efficiency control (Defense industry and transportation) State banks have increased their share of banking assets from 40% in 2000 to 60% in 2010 (Vernikov 2012). Cheap capital, implicit state guarantee & large economies of scale ⚫ Rosneft thrives on Yugansk assets Most state companies lose out on the market but seize or purchase assets with state leverage#10Gazprom: The Weakest Link Challenge: US shale gas revolution has diverted LNG to Europe and European gas prices have halved. • Gazprom is completely dependent on piping gas to Europe . European Commission is pursuing anti-trust case against Gazprom - outcome given • Gazprom's profit will be wiped out • But that is the dominant source of rents for the Kremlin#11Sensible Transformation of Gazprom Stop all mega projects (South Stream, Nord Stream & new headquarters in St. Petersburg) Carve out Gazpromtransgaz as pipeline company • Sell off utilities, finance and media, etc. (much done) . Divide production into separate medium-sized companies But then Kremlin's slush fund would disappear = not likely#12Where Gazprom Goes, Russia Goes Gazprom's crisis is the key to the future. of state capitalism and Russia • This crisis can be averted by swift changes of oil and gas prices, but that is not likely • If Gazprom no longer delivers rents, the Kremlin has little reason to maintain state capitalism, which may dwindle