The Russian Antimonopoly Committee has claimed that the state share of Russia’s GDP has increased from 35 percent in 2005 to 70 percent in 2015, but this widely cited assessment does not appear to be based on any profound analysis.3
In 2017, Russia’s Statistical Committee (Rosstat) finally published assessments of how much of value was added in each sector. Rosstat did not offer a sum, and some sectors are missing, such as defense and security services, presumably corresponding to a residue of 10.2 percent. Summing these up offers a public share of GDP of about 45 percent in 2016. Given that this first official attempt at estimating the public sector was partial and clearly aimed at playing down the public sector, it needs to be taken with a big grain of salt.4
The best analytical assessment available has been elaborated by a group of researchers led by Alexander Radygin of the Gaidar Institute for Alexei Kudrin’s Center for Strategic Research. They divide public economic activity into three elements: public service sector, enterprises with state participation, and state unitary enterprises (the old type of Soviet enterprises). Their assessments cover the period from 2006 to 2016. By this assessment, the overall size of the public sector went from 39.6 percent of GDP in 2006 to 51.7 percent of GDP in the financial crisis year of 2009 and then down to 46.0 percent of GDP in 2016. These appear to be the most reliable numbers on the size of the public sector in the Russian economy.5
The financial crisis of 2009 with its massive state bailout increased the public sector by 11 percent of GDP in a single year, whereas the many state purchases of big private companies in other years did not really register. Yet this makes sense if we think of how the public enterprise sector is composed and functions. Russian state enterprises tend to be monopolistic, each dominating a big sector of the economy. They usually do not compete with private enterprises, apart from on the margins. The industries dominated by state enterprises are energy, transportation, banks, and armaments production, while metallurgy, mining, and telecommunications, which are often state owned in other countries, are predominantly private. The retail sector and most consumer services are entirely private. Thus, the state sector consists primarily of the declining industries, whereas private enterprise dominates the dynamic industries.
State capitalism is a common phenomenon around the world, but its nature varies greatly from country to country. Russia’s state capitalism appears particularly inefficient and dysfunctional. Joshua Kurlantzick has eloquently summed up the peculiarities of Russian state capitalism:
Unlike Brazil or China or Singapore, Vladimir Putin’s Kremlin has not used the state’s sizable currency reserves to invest in young Russian companies, promote new industries, or even make new investment in oil and gas extraction technology. Neither has Russia forced state firms to compete with each other and with foreign firms operating in their domestic markets. . . . Instead, in Russia, state companies throttle any potential private-sector competitors. Under Putin, the Kremlin has allowed just one or two state firms to dominate nearly every leading industry, with each company staffed by Putin loyalists. Companies that have resisted state takeover have been sacked with enormous tax bills until they sell out. Many of the most promising young entrepreneurs in Russia simply have fled the country.6
Radygin and his coauthors offer a similar assessment: “The share of state ownership in a company reflects negatively on efficiency.” The degree of inefficiency of state companies they record is truly astounding. In the 1990s, most of the old, inefficient state unitary enterprises went through corporatization, which both facilitated privatization and corporate governance. In 2016, state unitary enterprises generated only 1.5 percent of GDP, while companies with state participation delivered 25.3 percent of GDP. Many but not all of these companies have private shareholders. Yet since 2003 corporate governance has hardly improved.7
The problem is thus not only state capitalism but how the Kremlin pursues it. It ignores competition, investment, technological development, and entrepreneurship. The state enterprises have many other purposes—political control, social mitigation, and personal enrichment of the Putin elite—as Boris Nemtsov, Vladimir Milov, Leonid Martynyuk, Karen Dawisha, and the Panama Papers have documented so well. Each big state enterprise is managed by a close associate of Putin, and the top state managers are subordinate to the president rather than the state.8
Rosneft’s seizure of Yukos was the epic battle of state capitalism versus private ownership. It marked the end of the Yeltsin oligarchs. Rosneft was a state company composed of remaining state firms, often with substantial private minority shares. Its many assets were spread out and difficult to manage. From 1998 to 2002, three attempts were made to privatize Rosneft, but the government failed to sell on each occasion because the expected prices were deemed too low.
The main reason for Rosneft’s survival as a state company was its strong chief executive, Sergei Bogdanchikov, who wanted to avoid privatization and strengthen the company. He received political support from Igor Sechin, one of Putin’s closest aides.9
Rosneft illustrates how state companies evolve in Russia. The seed is a remnant of state property. The next element is a strong executive. The third factor is a man close to Putin, who wants to promote a certain renationalization in his own material interest. Decisive, however, is whether the president finds reason to get into the act. When he does, money is not a problem, which also means that the state does not care about efficiency or profitability. Cheap public funding or low private asset prices are usually at hand. This shows why full privatization was so important. If no significant state company exists in an industry, a renationalization drive is much less likely. Good examples are the Russian steel and cement industries, which remain private, while such industries are owned by the state in many other countries.
Rosneft’s battle with Yukos took place in 2003–2004. The preeminent expert on Russian oil, Thane Gustafson, sets the start in 2002: “In 2002 . . . the hard-line silovik wing of the Kremlin—led behind the scenes by Putin’s chief assistant Igor Sechin—joined forces with Sergei Bogdanchikov in the campaign against Mikhail Khodorkovsky and Yukos.”10
On February 19, 2003, Putin held his annual meeting with a score of oligarchs in the Kremlin. The theme chosen by the Kremlin was corruption in Russia. Putin declared that his aim was “to liquidate the very basis of corruption”: “During the last two years, new laws were adopted to de-bureaucratize the state apparatus. Unfortunately, so far we see no real improvement. . . . And today I would like to hear your views.”11
Mikhail Khodorkovsky, the CEO and biggest owner of Yukos, took Putin at his word. He made a presentation in the televised meeting showing that the state-owned oil company Rosneft had purchased the small oil company Severnaya Neft for $600 million, although Severnaya Neft had been privatized for $7 million to a former deputy minister of finance named Andrei Vavilov two years earlier. Implicitly, Khodorkovsky accused the Rosneft management of corruption. Later that year, when I asked Khodorkovsky privately about this, he claimed that they had reliable information that Vavilov had paid a kickback of $200 million.12
Furiously, Putin exclaimed that Khodorkovsky, of all people, had no business complaining about corruption. Referring to Khodorkovsky, he stated: “Having made their billions, they spend tens, hundreds of millions of dollars to save their billions. We know how this money is being spent—on what lawyers, PR campaigns and politicians it is going, and on getting questions like these asked.” Previously, Khodorkovsky had presumed that the kickback went to Sechin and Bogdanchikov. Now the thought struck him that Putin might have been in on the act.13
In July 2003, Khodorkovsky’s first deputy, Platon Lebedev, was arrested, and on October 25, Khodorkovsky himself was arrested. The original legal complaint was the privatization of one subordinate company, the fertilizer plant Apatity (now called Phosagro and owned by Putin cronies), but the prosecutor general and the tax administration eventually prosecuted Khodorkovsky and Yukos for major tax crimes. Profit taxe
s varied greatly between different Russian regions, and Yukos had used domestic regional tax havens. Both Khodorkovsky and Lebedev received long prison sentences. In May 2005, Khodorkovsky was sentenced to nine years in prison for tax evasion. In 2007, additional charges were brought against Khodorkovsky for embezzlement and money laundering, implausibly for having stolen the oil for which Yukos had not paid tax, and his prison sentence was extended to eleven years. Many other Yukos managers were sentenced to prison or fled abroad.14
Putin’s rationale was obvious. Aspiring to consolidate political power, he targeted one man, the wealthiest and most outspoken big businessman, to teach all the others who was the boss. If he crushed Khodorkovsky, he had defeated all the big business leaders. Khodorkovsky did many things that could enrage Putin, and opinions over the trigger vary. Khodorkovsky sponsored scores of candidates from various parties for State Duma elections in December 2003. He donated about $100 million a year through his Open Russia Foundation to build Russian civil society. He called for the construction of private pipelines to both China and the Arctic Sea, attempting to break the Transneft state export pipeline monopoly. In the summer of 2003, Yukos lobbyists defeated Putin’s government in the State Duma when the government tried to hike taxes on oil companies. In the fall of 2003, Khodorkovsky was close to selling a majority stake in Yukos to Chevron or ExxonMobil. Presumably, Putin’s main problem with Khodorkovsky was that he was the most daring big private businessman. If Putin took him down, the others would fall into line. Political scientist Stephen Fortescue issued the verdict: “Above all it was designed to put all the oligarchs in their place by making a victim of the most independent-minded of them.” It worked.15
Meanwhile, Yukos was confiscated. The tax authorities seized the company and sold off its parts to Rosneft for a pittance. In December 2004, Rosneft took over Yukos’s main oil field, Yuganskneftegaz, at a bargain price in a farcical executive auction before Christmas on December 19, 2004. The Russian authorities had scared away all other companies, so it was open only to Gazprom and Rosneft. Gazprom withdrew at the last minute because of international legal concerns, but Rosneft had no foreign assets to bother about. As Thane Gustafson recorded: “Two people claiming to represent Baikalfinansgrup (they were later identified as being employees of Surgutneftegaz) submitted the sole bid for Yugansk-neftegaz, at $9.37 billion. The hammer went down, and 76.8 percent of the shares of Yuganskneftegaz had changed hands.”16
This “auction” price was far lower than any assessment. In October 2004, the “Ministry of Justice valued [Yuganskneftegaz] at $14.7 billion to $17.3 billion. J.P. Morgan, hired by Yukos, valued the company at $16 billion to $22 billion.” Nor was Baikalfinansgrup a real enterprise. It was an unknown shell company, registered in a broken-down wooden shack in the provincial town of Tver, close to Moscow. At a press conference on December 21, Putin revealed that he was initiated: “The shareholders of [Baikalfinansgrup], as is well known, are exclusively physical persons, but ones who have done business in the energy sector for many years.” The next day, Rosneft announced that it had acquired Baikalfinansgrup, underlining that this was not an auction but a charade.17
Repeatedly, Putin stated that he opposed the nationalization of Yukos and relied on the rule of law, although the politicized legal proceedings suggest that he had favored confiscation all along. On October 27, 2003, Putin claimed: “But there will be no meetings and no bargaining over the law enforcement bodies and their activities, so long, of course, as these agencies are acting within the limits of Russian legislation. . . . Neither the executive authorities nor even the Prosecutor’s Office can deprive someone of their freedom, even for the period of pre-trial detention. Only the court has this power . . . and before the court, as before the law, all should be equal.”18
In an Italian interview in early November, Putin declared: “I am categorically against re-examining the results of privatization. . . . There will be no deprivatization or a re-examination of the results of the privatization, but everyone will have to learn to live according to the laws.” On June 17, 2004, Putin told reporters: “The Russian administration, government and economic authorities are not interested in bankrupting a company like Yukos. . . . The government will try to ensure that this company does not go bankrupt.” On September 6, he said: “I don’t want to bankrupt Yukos. . . . Give me the names of the government officials who want to bankrupt Yukos and I’ll fire them.” In spite of all these statements by Putin, the confiscation of Yukos proceeded apace and Putin appeared to do nothing to stop it or even slow it down.19
Through the Yukos confiscation, the Kremlin had declared its preference for state ownership of major enterprises. As will become evident, whenever a manager of a major state enterprise found an excuse for taking over a well-run private company, he could count on the president’s tacit blessing. The general prosecutor’s office or the tax service initiated a corporate raid, and one or two state banks provided the financing needed for the takeover. Unlike in the Yukos case, the former owner usually received some payment. Whether it was high or low appears to have depended on the owner’s personal relations with top officials. Some were forced into fire sales while leaving the country, whereas others received good prices.
Incredible as it appears in hindsight, many foreign investors believed that Putin was establishing law and order in Russia and that Khodorkovsky was a crook. The stock price of Yukos held up for a year before it collapsed, causing US investors losses as large as $12 billion. In December 2013, Putin pardoned Khodorkovsky, which seemed to be connected with Putin wishing to do something positive before the Sochi Winter Olympics in early 2014. Khodorkovsky left Russia immediately. In December 2015, the Russian prosecutors opened a new case against Khodorkovsky, now accusing him of murder of the mayor in Nefteyugansk in June 2008.20
Russia’s development of state capitalism might appear paradoxical. From 1991 to 2002, the country carried out the greatest privatization the world has ever seen. Why did this policy reverse itself into rampant renationalization? The Russian government never announced any reversal, but the real turning point was the Yukos case. In 2006–2007 the official policy toward ownership changed in favor of state enterprises, promoting big national champions that each dominated their industry.21
The restructuring of the banking sector after the financial crash of 1998 lay the foundation for the future renationalization. Half of the private banks went under, including all the big oligarchic banks except for Alfa Bank. Only the old Soviet savings bank, Sberbank, offered deposit guarantees, thus attracting much of ordinary people’s savings. The five big state banks—Sberbank, VTB, VEB, Gazprombank, and Rosselkhozbank—had state guarantees, which granted them cheap market funding. The government’s reliance on state banks was reinforced during the financial crisis in 2008–2009.
Enterprise financing falls into three separate segments. The big Russian state banks give preferences to large state enterprises, whereas large private Russian companies have raised much of their funding abroad and small and medium-sized firms turn to small private banks. As the big state banks have gradually gobbled up small and medium-sized banks, small enterprises have had ever less access to credit. The playing field has become increasingly tilted to the benefit of state-owned enterprises.22
In late 2006, overt government policy changed. During Putin’s annual call-in program, a lumberjack in Northern Russia queried Putin about his view of the transfer of forests to private hands, suggesting that it would “damage the interests not only of the logging companies but also of ordinary people, who won’t be able to just go into the forest to gather mushrooms and berries.” Putin took the opportunity to distance himself from “liberal economists” who “think that putting the forests into private hands is a more radical and economically efficient method of developing the sector. . . . In our current situation it is still too early to transfer such an important national resource as our forests to private hands, and I will not sign such a law.�
�� With this answer, Putin distanced himself from privatization in general.23
Russian government policy changed accordingly. With a minimum of public discussion, the Kremlin decided to merge whole industrial sectors into conglomerates enjoying near monopolies in 2006–2007. The new idea was to create national champions. The government had successfully taxed the oil rents of private oil companies, but the Kremlin preferred to channel these rents through state enterprises.
Two close KGB friends of Putin promoted alternative schemes, First Deputy Prime Minister Sergei Ivanov, one of Putin’s KGB friends from St. Petersburg, and Sergei Chemezov, a former KGB colleague of Putin’s from Dresden and head of Russia’s arms exporter Rosoboronexport. Both wanted state-owned companies to become more independent from the ministries, which supervised the old “unitary” state enterprises, and to give them independent supervisory boards. Ivanov and Chemezov proclaimed that the concentration of resources would lead to faster technological development.24
Ivanov, who oversaw for the military-industrial complex, favored standard Western open joint-stock companies with majority state ownership. His two creations were the United Aircraft Corporation, which he chaired, and the United Shipbuilding Corporation, chaired by Igor Sechin.25
Chemezov proposed an original scheme called state corporations. Legally the state corporations were strangely set up as nongovernmental organizations (nekommercheskie organizatsii). In 2007, six such state corporations were set up. Each was formed with a separate law. Since they were nongovernmental organizations, their formation amounted to the privatization of their assets to the benefit of the president, who appointed the boards of these state corporations. The political scientist Vadim Volkov has calculated the production assets transferred to these nongovernmental organizations at $80 billion, and the government topped up this amount with a capital infusion of another $36 billion.26
Russia's Crony Capitalism Page 12
