Russia’s economy: Command and control

Date: 10/04/04

From communism to concentration

DISTORTIONS are to be expected in any economy making the slow journey from socialism to capitalism. Russia has more than most. Working out which of these distortions date back to the Soviet period and which have emerged during the wild ride since 1991 is no easy task. The World Bank's biennial report on the country, published this week in draft form, tries to tease these apart. It is likely to stoke a burning debate about the role of the “oligarchs”, the industrial magnates who control much of the economy.

The report poses a question to which President Vladimir Putin would dearly like to find an answer: what will it take to keep the Russian economy growing? In Mr Putin's first term the economy did well, thanks largely to rising oil prices and the recovery from the 1998 financial crash. Now, however, restructuring and new investment are required.

One legacy of communism is a lot of biggish cities in remote, cold places, whose economies often depend on huge, Soviet-era factories. That, in turn, means that although Russia's factories are too big to be efficient, its companies are too small: there are no western-style carmakers or electrical-goods firms, say, with networks of manageably sized plants. Yet there are also too few small businesses, which have more trouble than big ones getting bank credit and fighting off the predations of criminal gangs and corrupt, or merely officious, bureaucrats.

The economy's other big weakness is its dependence on natural resources, especially oil. Another World Bank study this year found that the energy sector's share of GDP, officially 9%, is closer to 20%. Such riches can be deadly, says the report. The federal government has too often blown oil revenues on bailing out regional governments, which use the money to mop up unemployment by creating public-sector jobs.

None of this is surprising. The main novelty in the report, however, is its analysis of ownership concentration, an effect of the rigged privatisations of the 1990s in which many oligarchs acquired their companies for tiny fractions of what they are now worth. These firms hulk over the rest: the ten largest ownership groups account for some 60% of the Russian stockmarket, a concentration matched in recent times only in Suharto's Indonesia. The oligarchs are under attack from Mr Putin: one, Mikhail Khodorkovsky, was arrested last October and remains in custody. Their defenders argue that they are doing most to consolidate and modernise Russian industry. What does the evidence say?

The report's authors commissioned surveys all over Russia to assemble “the first detailed database” of often murky ownership structures, and matched the results with data on economic performance. They found that, unsurprisingly, big financial-industrial groups (they avoid the charged word “oligarchs”) and foreign owners invest more than government or other private owners. But this is mainly true only in the energy sector; elsewhere the gap is slight. Many magnates are branching out into other industries, but they do not seem to run their companies any more efficiently than the average.

The authors then mapped the ownership database against regional laws that give individual firms preferential treatment, such as tax breaks. The result was a list of 25 “captured” regions (out of 89) that are evidently under the sway of one or a few big companies. In fact, the oligarchs are less likely than other owners to get preferential treatment. But when they do, they squeeze more benefits out of it than other owners can, and other local businesses suffer more as a result.

Because ownership is often a secret, some of the data are only a first stab at the truth. But the report is the clearest evidence yet of the need to make life easier for smaller and non-energy businesses. Now, with a glut of oil revenues, is a good time to cut taxes and bureaucracy, fight corruption, strengthen (or create) antitrust enforcement, invest in infrastructure and so on. It is the usual prescription - but it is needed to end Russia's dependence on a few sources of growth.