Russian language “Vedomosti” carried an article, “Пострадал за городки”, last week which was quite informative in a banal sort of way.

The article covered internal Medvedev-headed cabinet discussions on 26 June about transferring unused military property – social infrastructure and housing – to local government and regional authorities. This infrastructure is generally not in good-shape and the meeting discussed the transfer of money to local and regional authorities for its maintenance. Medvedev has earlier directed that a methodology for the calculation of these subsidies be prepared by 15 June.

«Есть методика?» Medvedev asks if there a methodology, but is told by Vice-Premier Dmitry Kosak that there are only some proposals from the Ministry of Finance that have not been agreed with others.

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According to press reports last week, the Medvedev government will this week try to firm up various aspects of planned privatizations in the period to 2017. At this stage, the privatization plan is basically the same as was approved by then president Medvedev in August last year – with the exception of companies in the “fuel and energy” sector.

(For more background, see my 18 July 2011 article entitled “Medvedev should ease up on ‘privatization’!” and my 31 July 2011 article entitled “Privatization – ‘what to’ and ‘how to’!” by clicking on “Expert Group 15: Managing government property and privatization” in the right-hand column.)

It appears that the great majority of state assets in the “fuel and energy” sector (with the exception of Gasprom) are going to be consolidated under the control of 100% owned Rosneftgas, whose chairman of the board is likely to be Igor Sechin.

Rosneftgas already owns about 77% of Rosneft, whose CEO is also Sechin, and about 11% of Gasprom. Rosneftgas will now also take equity positions in a number of other large “fuel and energy” sector companies which are fully or partly owned by the state.

According to Elvira Nabiullina, assistant to President Putin (and former Minister of Economic Developmemt), the idea is that Rosneftgas will be an “investor at the stage of pre-sale development”. That is, Rosneftgas will inject capital into these companies and prepare them for privatization when market conditions are better and/or when the companies themselves are in a better financial condition.

These companies will issue additional shares (so boosting their own capital) to Rosneftgas which will finance their purchase with its present cash holdings and dividend flow (from its shares in Rosneft and Gasprom). As well, it has the capacity to borrow significant funds in the market (if necessary, using its shareholdings as collateral).

The Ministry of Economic Development has, according to an “Vedomosti” article last week, suggested that by 2017 the state exit from shareholdings in the following way:

completely (with the exception of a “golden share” which will permit state representatives on the board of directors to veto certain types of transactions) from Rosneft, RusHydro (hydro-electricity producer in which state shareholding is about 60%), Zarubezhneft (state controlled, and engaged in the oil sector outside of Russia), and subsidiaries of MRSK-Holding (the Inter-regional Electricity Distribution Grid of which the state owns about 54%);
completely (with no-golden share) from Inter-RAO (which mainly has various energy producing assets);
and sell the state holding in Transneft (oil pipeline monopoly) down to 75% (is presently about 78%).

A sale of a small packet of FGC (Federal Electricity Grid in which the shareholding is about 79%) shares is foreseen in the privatization program for the next year or so, and there will supposedly be an eventual sale of 25% of Russian Railways (presently owned 100% by the state).

There are also ports. The state’s 20% share in Novorossiysk Sea Port, the country’s biggest sea port, is planned for this year — although Sechin has reportedly being trying to get it included under the Rosneft or Rosneftgas umbrella. Also reportedly slated for sale are 55% of Vanino port and about 25% of Murmansk port.

According to the “Vedomosti” article, Vanino is one of “the largest” ports in Russia and four companies have received Federal Anti-monopoly Service (FAS) approval to bid.

The state share in Rosnano will be reduced to 90%, and the state will also eventually sell additional or all shares in Sberbank,VTB, Aeroflot, Sheremetyevo, Sovcomflot, Alrosa and Rostelecom.

There are thus a lot – and it is a very mixed bag – of assets to be sold. However, there does not seem to be much of an overall strategy – perhaps other than reducing the state share in the economy (which is clearly desirable) and exchanging equity assets for cash (which, in itself, is less clearly desirable in economic terms).

Or, maybe there is a sort of “strategy”!

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Jim O’Neill, of Goldman Sachs and coiner of the BRIC acronym,  struck a positive note on Russia at a recent conference in London, saying: “There are some good faces in the new cabinet. Arkady Dvorkovich is a natural reformer.”

Once again, Jim has demonstrated his shallow knowledge of Russia (See also my posting of 3 December 2011 entitled “BRIC Jim O’Neill’s simplistic thick-brick thinking on Russia!” under “Expert Group 1:  New model of economic growth. Securing macro-economic and social stability” in the right-hand column.)

Dvorkovich is little more than a “decorative” feature in the new cabinet.

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President Putin’s appointment of Igor Kholmanskikh, the head of a military tank assembly line, directly to the position of presidential plenipotentiary (representative) in the Urals district (one of 8 in Russia) is a small disaster for Russia at the PR level and a waste of an opportunity to pursue economic reform.

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The last weeks of Vladimir Putin’s time as prime minister have been filled with a flurry of meetings and statements which might suggest “economic reform” will begin to rapidly accelerate in the weeks after the May 7 presidential inauguration (and presumed return of Dmitry Medvedev as prime minister).

But what is “economic reform”?  Or more precisely, what is sensible economic reform? Is “strategic” economic reform always the best? And, how effectively will reform be implemented?

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Disagreements about economic policy within the Russian government often spill over into the public arena and get reported in the media to an extent which would surprise most people in such English speaking countries as Australia, the UK and the US.

In part, public exposure of internal government economic policy differences reflects less need for government discipline than when faced with an effective political opposition ever ready to attack (particularly as in the Westminster system used in Australia and the UK).

However, it is also partly a way of trying to influence the views of the president and prime minister. President Medvedev has, on occasion, had different views to Prime Minister Putin and has been quite insistent on specific economic measures (such as the payroll based insurance contribution and privatization) even if actual implementation of his demands has been tardy. It will be interesting to see the extent to which such public airing of ministerial differences (and those of official advisers) will continue when the roles of Medvedev and Putin are reversed: Putin will be calling all the shots with Medvedev (psychologically defeated by Putin in the unspoken contest to be the presidential candidate) having little independent authority.

I would also note that the public debates of economic policy by Russian ministers (and various official advisers) are often more sophisticated than what appears in the media of most “modernized” English speaking countries. The Russian system of appointing cabinet ministers is more akin to the US than to Australia or the UK and in the area of economics, at least, the result is often greater intellectual competency. Of course, as in any country, this does not necessarily mean that the final decision makers are competent economic policy makers.

Last week a Higher School of Economics (HSE) “conference” to discuss economic reform essentially turned into a mini-debate on budget issues between Elvira Nabiullina, the Minister of Economic Development, and Finance Minister Anton Siluanov.

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As noted in the previous blog on this site, the final “Strategy2020” Report has six parts with the first being entitled a “new model of economic growth”. Also as noted, this part is divided into three sections with the second entitled “strategy for improving the business climate and increasing investment attractiveness with the aim of moving to more stable growth”.

Although this section makes some important points, it is not wildly exciting reading and I was tempted to pass-over it and try to go onto something else. However, I then noticed an article on the “Russia Profile” internet site about SMEs soon being able to more easily purchase the premises which they presently rent from various levels of government. See: http://russiaprofile.org/business/56557.html

These are extracts from the article:

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The final “Strategy2020” Report (of 864 pages), which was completed in December, has finally been released and I will attempt to cover some of the most interesting “economic” issues over the next few weeks as part of my commentary on unfolding economic developments. Many of the Report’s main recommendations have already been aired in the media, either as direct reporting or as part of coverage of the discussions of policy makers as they try to decide what course to set over coming years.  

Apart from the introduction the Report is divided into six main parts, but there is also a so-called “budget maneuver” section at the end which makes “suggestions for restructuring the expenditure side of the budget”. The six  main parts are: 1) “new model of economic growth”; 2) “basic macro-economic conditions for growth”; 3) “new social policy and development of human capital”; 4) “infrastructure, including balancing development and good living environment”; 5) “efficient government”; and 6) “external economic issues”.

These main parts encompass the work of all of the 21 Expert Groups listed on the right-hand side of this page. The whole report (in Russian) can be accessed by clicking on “2020strategy.ru” in the top right hand corner of this page.

The first main part of the Report, “new model of economic growth”, is divided into three sections: “securing macro-economic and social stability”; “strategy for improving the business climate and increasing investment attractiveness with the aim of moving to more stable growth”; and “stimulating innovation”.

In this “post/blog/article” I will concentrate on the “securing macro-economic and social stability” section. Anyone familiar with the Russian economic policy debate will aware of most of the issues. So, I will only mention what I think are the most important or interesting issues and, occasionally, add some commentary.

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In terms of political and economic reform, the next six years of Vladimir Putin presidency will not be particularly eventful for Russia. The trend will not be “stagnation”, but a slow crawl progress in both political and economic terms. Thus, much of Russia’s huge potential to become a wealthier, smarter and more powerful country will be wasted.

Putin will serve his full 6 years. He will not quit early as it is not in his character, and he will feel that the “majority” who voted for him have vindicated his own belief that Russia needs him. And, there is no-one to tap him on the shoulder and say it is time to go. Moreover, the historical examples of someone in his position — much power over a prolonged period of time — tell us that he will stay while he can.

In some ways Putin reminds me of a CEO of a “business association” that I worked for some years ago. This man – I will call him Peter – had been a prominent sportsman and worked hard to maintain his fitness in his late fifties. He was, in many ways, a well organized and efficient administrator. He had been employed to bring order to an organization that was seen to have under-performed because the previous CEO was a somewhat whimsical man who was more interested in pursuing often unrealistic ideas than in tight administration.

However, it quickly became clear that Peter would be able to do little more than bring a sense of order to the organization. What he lacked was not intelligence, but the necessary personal characteristics that were needed in a leader to take the organization forward once some order was established.

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Jim O’Neill of Goldman Sachs who originated the BRICs slogan has published a book, “The Growth Map”, which suggests his knowledge of Russia is quite shallow and unsophisticated (sometimes “thick as a brick” economiсs, with too little feeling for psychology or sociology).

Good analysis of a country’s economic prospects requires more than anecdotes and an ability to handle data. Demographics, the presence of technology, education levels etc – mentioned by Jim in his prognosis for Russia – are not particularly difficult issues to deal with, or even measure.

The really difficult issue to assess is how effectively a society will bring these, and other, things together to maximize productivity increases. The optimal way to do this will vary between countries, and over time for any one country. There are few general hard-fast rules, and a lot of judgment must be applied.

According to Stefan Wagstyl, in articles in the Financial Times, Jim argues that “that political ‘antipathy’ blinds western critics to Russia’s advantages, such as its strong position in technology and education. He concedes Russia does badly on corruption and the rule of law, but claims that Italy’s economy has ‘rolled along for years’, despite having weak rule of law for a long time.”

There is some truth in each of the points, but Wagstyl also wrote that Jim “has little time for western criticism of Russian authoritarianism or one-party rule in China. He quotes an American businessman recounting a line from a Chinese person, who had said: ‘What’s the big deal about voting? In the US everyone can do it and only half the people do. If voting were that great a thing, like sex for example, everyone would do it.’” According to Wagstyl, Jim argues that “a lack of democratic development does not seem to concern most Russians”.

This is childish simplicity – at least in regards to Russia!

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