Russian Economic Reform

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Sechin, BP and Rosneftegas

Published on September 24 2012
Posted by: jeff

At this time Igor Sechin seems to be facing defeat in his attempts to increase the influence of Rosneftegas (and himself) in the privatization of government owned assets in Russia’s fuel and energy sector. Prime Minister Medvedev (and his economic ministers) are demanding that Rosneftegas hand over most of its accumulated cash to the official budget in order to help pay for President Putin’s pre-election expenditure promises.

This has further stimulated Sechin to seek to develop a relationship between Rosneft and BP.

Are these developments good or bad for “Russian economic reform”?

Firstly, there are the possible macro-economic aspects.

At this stage, a closer relationship between Rosneft and BP would need to be considered in terms of long-term projects, so it would be unlikely that there would be a significant macro-economic effect over the next few years.

The pre-election promises are now a fact of life, and Putin needs to ensure that that they are implemented for the sake of his credibility – so, there is not much point in discussing their economic rationality.

In principle, the simple transfer (officially a dividend payment) of funds from the accounts of 100% state-owned Rosneftegas to the official Russian (state) ”budget sector” has no effect on the net financial position of the overall state sector of the economy – which, for purposes of this discussion, we will call the “general state” sector. One part of the “general state” sector has less cash (“in the bank”, so to speak), and the other has more (“in the bank”). However, the calculated “deficit” position of the narrowly defined official “budget sector” is reduced by the dividend payment from the “savings” of Rosneftegas because it is considered to be “income” of the official “budget sector”.

As an aside, it should be noted that if Rosneftegas had actually made the dividend payments some years ago, the official “budget sector” deficits for those years would have been less and — other things being equal — the “budget sector” would now have more cash “in the bank”. Use of that cash now would be considered as ”financing” the deficit of the official “budget sector” by way of reduced savings of the ”budget sector” rather than a reduction in the deficit — just as now Rosneftegas savings are, from a “general state” sector point of view, being used to “finance” the official “budget sector” deficit. There is perhaps a caution here for those commentators (and economists) who get too carried away by the words “budget deficit”!

But back to the main issue! To the extent that the cash is more likely to be spent by way of the ”budget sector” over the next few years on pre-election promises (and will not remain “in the bank”) than would have been spent by Rosneftegas (which is probably the case given that privatization and “investment” is a medium to long-term process), then this is a net boost to demand – and all other things equal, money supply – in the Russian economy. This will tend to support GDP growth over the next few years.

From here we could go on to consider a number of possible macro-economic consequences (eg inflation, the balance of payments, the ruble exchange rate etc) as well as possible macro-economic policy responses (eg increased government borrowing in the domestic market to reign in ruble money supply growth). This is where macro-policy becomes something of an art with no scientific certainties, and I would hesitate at this stage to give a definitive view on whether the macro-economic effects will on balance be good or bad for “economic reform”.

But, the situation looks clearer once we get away from the macro issues and move on to micro-economic issues. Here, the unfolding developments would appear to be better for “economic reform”.

While I have had some sympathy with aspects of Sechin’s “privatization” aims, I think that he cast the net far too wide. In particular, he has wanted to get Rosneftegas involved with such non-oil/gas entities as RusHydro (hydro-electricity producer in which state shareholding is about 60%), MRSK-Holding (the Inter-regional Electricity Distribution Grid of which the state owns about 54%), and FGC (Federal Electricity Grid in which the shareholding is about 79%).

In my view, such entities should be managed, recapitalized, and (fully) privatized – if at all – without the help of Rosneftegas. Indeed, this seems to be the intention of Medvedev and his ministers.

For backround, see my post/comment of 3 June entitled “Perverted ‘Strategic’ Privatization!” which can be accessed by clicking on “Expert Group 15. Managing government property and privatization” in the right-hand column.

So, in my view, the transfer of funds from Rosneftegas to the official budget will have at least one positive consequence.

Moreover, I do not see any particular negative micro-economic consequences from a closer Rosneft-BP relationship.

Thus, in terms of combined macro and micro economic consequences, the unfolding developments would seem to be to the advantage of “Russian economic reform”.