Russian Economic Reform


Ukraine’s Poroshenko is going to Australia: WHY?

Ukraine President Petro Poroshenko will speak in Sydney on 12 December at a Lowy Institute function:

Why is he doing this?  And why it is a bad idea!

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Published on December 09 2014

Perverted “Strategic” Privatization!


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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Published on June 03 2012

Presidential co-operation between Medvedev and Putin will not last!

Vladimir Putin and Dimitry Medvedev are two very different men in their basic psychological make-up and approach to government, and I find it difficult to believe that they will now be able to work together for a full Putin presidential term.

The tension between them has now been relieved by the final  announcement about the coming election — but it will eventually return in a slightly different form.

As I relate below, last week’s revelations about the draft Russian federal budget for 2012 and plans for later years – both composition and controversies – provides a basis for examining the way forward for the relationship between Medvedev and Putin and also for the Russian economy.

While Putin is now triumphant, Medvedev will be a diminished man in the eyes of many Russians who supported his “modernization” view of the way forward and also a diminished man in the eyes of his colleagues in government. Alexei Kudrin, who will almost certainly remain as Finance Minister, will treat Medvedev with contempt — both now and after March 2012.

Medvedev will also begin to see himself in a diminished light. Much as he wanted to, and in spite of the possibilities and his achievements, he could not summon the psychological strength to go against the man to whom he owed so much. The passing of time is likely to build a sense of regret – and even resentment — in Medvedev.

Putin will display loyalty to Medvedev because it is both his natural style and because Medvedev has demonstrated loyalty to him.

Nevertheless, I will be very surprised if Medvedev is prime minister at the end of Putin’s presidential term. Long before this the situation will be untenable for both men.

Budgets have income and expenditure sides to give a result.

On the expenditure side “Vedomosti” last Wednesday (21 September) carried an article that added force to the notion that Putin is a “hands-on” manager/leader and that Medvedev is more “principles” based.

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Published on September 24 2011

Dvorkovich verses Kudrin on “Insurance Contribution”

It is now some months since President Medvedev directed that some way be found to lower the 34% “insurance contribution” on wages up to the threshold – in 2011 – of 463,000 rubles per year.

How to achieve this has turned into a protracted dispute between ministers and officials from the ministries of “Health and Social Development”, “Economic Development” and “Finance”. The latter has finally gained the support of Deputy Premier Igor Shuvalov and Vladimir Putin for its variant, and a report has been prepared for Medvedev.

The Ministry of Finance, under Alexi Kudrin, suggested a new scale with the general rate being lowered from 34% to 30%, and with the introduction of a new 10% rate for wage payments about the threshold limit (which will rise to 512,000 in 2012 because of indexation for inflation associated wages growth). “Small business” will get a “discount”, in the form of a general scale of 20%, and a 7% rate above the threshold.

The Ministry of Economic Development had opposed the addition contribution and wanted this amount to be compensated from the Federal Budget. The Ministry of Health and Social Development had opposed the additional contribution by small business, but not for medium and large business.

The president’s assistant for economic issues, Arkady Dvorkovich, has reportedly “promised to fight to the bitter end” against the Ministry of Finance idea of the additional contributions of 10% and 7%. (He earlier had accepted, it was reported, the idea of an additional 5% contribution as part of a variant that included compensating the Pension Fund from, among other ways, privatization receipts.)

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Published on July 31 2011

Finance Ministry’s “banana republic” approach to PR

Expert Group 2, which is concerned with “Budgetary and monetary policy and macro-economic parameters for developing the Russian economy”, has been one of the least active of the 21 Groups. Budgetary and monetary policy can be quite technical issues and it is essential to get these right, but Group 2 might also consider helping the Ministry of Finance understand the PR side of macro-economic policy – after all, isn’t the idea of managing “inflationary expectations” really based on a PR stunt?

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Published on July 23 2011

Anti-monopoly laws, “smart” regulation, and business groups.

This Group has been very busy and considered a large number of detailed reports, surveys etc, one of which has striking estimates of the costs of “poor institutions”. “Badly functioning institutions” are said to be responsible for 25-30% of the cost of residential and commercial real-estate (in Moscow up to 60%); about 15% additional mark-up in retail trade, and about 10% in communication services. There are also reports of a round-table on “Business Associations and their role in the process of modernization in Russia”, and a report titled “Development and Application of Anti-Monopoly Legislation in Russia: Results and Problems” where the main identified issues are: too much emphasis on a “regulation” approach (for example cost plus) when considering the extent of monopoly price behavior rather than a more “protection of competition” approach; and a lack of independence of anti-monopoly authorities and courts.  

Jeff says that ….

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Published on July 11 2011

Bank Moscow fiasco!

Nearly 20 years ago, after my second visit to Russia as Chief Economist of HSBC (Australia) I wrote about the reform plans then contemplated:

“there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself”. (See left hand-side of page for full 1992 article.)

For two decades Russian economic policy makers have too often sought big game-changing moves – and then made a mess of the details to the great disadvantage of ordinary citizens. The various “privatizations” of the 1990s are the most obvious manifestation of this. We have yet to see how what the results will be for the new round of privatizations, Sochi 2014, the APEC Summit, or Skolkovo.

Nevertheless, there are many reasons to be optimistic about Russia.

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Published on July 03 2011

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