Russian State Corporations: A Stabilizing Economic Force or a Drag on Growth?

Despite initial enthusiasm that state corporations would increase efficiency and spur modernization of the Russian economy, these entities have become "an increasing target of criticism by those dissatisfied with the way the Russian economy is developing," argued Toby Gati, Senior International Advisor, Akin Gump Strauss Hauer and Feld LLP. At a 30 March 2009 lecture at the Kennan Institute Gati described this new ownership structure in Russia, commenting on its advantages, shortcomings, and future prospects.

Since 2000, the Russian government's role in the economy has grown significantly. One aspect of that growth is the emergence since 2004 of a new ownership structure: state corporations.
Several of these corporations were created to pursue specific national goals, such as insuring bank deposits, organizing construction for the 2014 Olympics, subsidizing housing repairs, or encouraging innovation through the development of Russian hi-tech and the nanotechnology sector.

State corporations were originally heralded as drivers of economic growth, diversification and innovation. They also were viewed as a vehicle to stimulate private investment using state money and help Russian companies compete in the world economy. Increasingly, however, questions have been asked—including at high political levels—about the non-transparent way that top management and bureaucrats have managed the billions of dollars of property and funds allocated to them.

The seven (soon to be eight or more) state corporations enjoy several advantages under Russian law. They are formed by separate federal laws and do not operate under the same legal regime as private businesses or state-controlled joint stock companies. The privileges granted to state corporations give them great latitude over their operations and the acquisition of assets. They are not subject to Russian bankruptcy legislation and receive benefits on taxes and customs duties similar to those granted to non-government organizations. "One of the characteristics of these corporations is that formally they don't have to report very much to anyone on their activities," continued Gati. They are not required to provide detailed annual financial reports and lack transparency in other respects. In fact, the lack of transparency combined with access to state budgetary funds may well explain "why this type of organization might be attractive," argued Gati.

The President of the Russian Federation appoints five of the seven heads (presidents or general directors) of the state corporations. With so much at stake, "you would want to put in charge of a state corporation somebody trusted, whom you knew well" to manage their activities and provide oversight, commented Gati. Not surprisingly, the supervisory boards are composed of politically influential individuals, including government officials, ministers, and/or members of the Presidential Administration or Duma.

State corporations have recently attracted a lot of criticism, especially concerning their use of state assets and how their activities are monitored. Critics often cite the potential for corruption and stifling of competition. From Gati's point of view, the official answers to these criticisms—government pledges of better oversight and promises to privatize or liquidate these corporations in the future—ring hollow, especially because there continues to be talk about creating still more state corporations.

The ongoing financial crisis is also fueling criticism of state corporations. A public debate has begun about the type of economic activities the state should support during a period of declining revenue. The prospects for state corporations may thus be closely tied to the duration and severity of the current crisis, as well as to the political fortunes of senior officials in the government and presidential administration, Gati added.

So far, the existing arrangements and governing legislation have proven resistant to change. Business groups and some government agencies have proposed measures to strengthen supervision over state corporations and other state-run entities controlling large segments of the Russian economy. However, these measures do not get to the core of the problem; these structures are rarely able to innovate or to make the productive investments that are so needed during tough economic times.

Gati concluded by weighing two possible scenarios. If the economic crisis persists and the state faces continuing budget deficits and shrinking reserves, "there won't be much money around to fund these projects," Gati said. State corporations may face steep reductions in state financing and many more questions about their mode of operation. In that case, the privatization of state corporations or at least the privatization of some of their assets might actually take place. Such actions would address the concerns of those who oppose a further expansion of the state's role in the economy. If the crisis recedes, then so will the pressure for change. In other words, Gati noted, "it will be back to business as usual."