New privatization: Is it time for the Russian economy to "mature"?

On September 6, the magazine "Company" published an article by the chairman of the Accounts Chamber of the Russian Federation, Alexei Kudrin, under the heading "It's time to give the economy to mature". In it, the former Russian finance minister raises the question of the need for a new large-scale wave of privatization in the Russian economy.

Today, the issue of the competitive environment in the domestic economy is a serious challenge. We need a significant trend towards denationalization, which will eventually bring us to a new level of efficiency.
— noted in the article.



Thus, Kudrin views the high share of the state in the economy as a problem that needs to be addressed, and proposes to carry out privatization aimed at leaving the state from "economic sectors living in market conditions."

Minimizing the risks

Briefly retelling the content of Kudrin's article, such a proposal is justified primarily by the risks of a high degree of state participation in the Russian economy associated with a decrease in the efficiency of the functioning of market mechanisms as a result of an inevitable conflict of interest. The state, being the regulator that sets the rules of the game, is at the same time the owner of the largest players in the market, which, of course, cannot but affect the level of competition, which is sometimes replaced by administrative resources and the institution of lobbying.

As a result, large enterprises, the shareholders of which are the state, not only occupy predominant market positions, but are also distinguished by the desire to monopolize both their own and related industries - a situation that is extremely harmful for building a competitive market.

It is clear that all of the above is primarily devoted to Sberbank and VTB, which are actually mentioned in the article as the first candidates for privatization. Both companies hold leading positions in the Russian financial market. According to Interfax-CEA, the share of Sberbank's assets is 44,4% (35,2 trillion rubles) of all assets of the 10 largest players in the Russian Federation, VTB has 23% (18,3 trillion rubles) of assets. Nevertheless, as practice shows, state-owned banks are not going to be satisfied with their dominant position in the market and are beginning to actively expand into other sectors.

So, in 2018, VTB bought 29% of the largest Russian retail chain Magnit by the number of stores for 138 billion rubles. In addition, the VTB banking group also includes construction and IT companies, seaports, telecommunications giants, logistics enterprises and even the largest vertically integrated grain holding in the Russian Federation.

Sberbank is also not lagging behind. The financial giant, which pompously launched a new ecosystem of products in September 2020, not only re-branded to become Sberbank officially, but also showed the market an inexhaustible appetite for related industries. As a result, in addition to the main financial sphere for itself, the Sber ecosystem today includes food delivery and ticket sales, logistics companies, pharmacies, online cinemas, taxi call services, car sharing, car sales, cartography and much more (for full the listing of all assets of "Sberbank" requires a separate article).

Of course, Aleksey Kudrin is referring to the situation in which the largest banks dominate the new branches of the Russian economy. And this state of affairs is hardly useful for the country. For having received a share in a new segment, banks, which, in comparison with other market participants, have practically unlimited financial capabilities, as well as a "halo" of state presence, inevitably try to monopolize them, which has an extremely negative effect on the situation with competition in the market - the most important indicator of the market economy.

It is precisely the minimization of such risks of high state participation in the economy, according to Kudrin, that requires achieving "full transparency in the activities of state-owned enterprises, ensuring fair rules of the game" and "regularly assessing the effectiveness of state-owned enterprises." And in the event of a drop in indicators, the state “needs to give way to private business”.

Financial issue

In addition to the issue of competition, in the context of denationalization and privatization, the issue of finance is also important. As Kudrin notes, "Privatization can bring to the treasury an average of about 200-300 billion rubles annually for 5-6 years."

Nevertheless, the financial aspect looks at least controversial as a key goal of privatization. Taking into account that the Government prefers not to eliminate the budget deficit, but to fill the National Welfare Fund (NWF), the volume of which increased by 260 billion rubles in August alone, the idea of ​​privatization that can bring the same money, but already in a year and through another sale state property does not look very attractive.

The budgetary rule, which effectively cuts off oil revenues into the "box", has led to the fact that the amount of funds in the NWF now amounts to more than 14 trillion rubles. Against this background, the execution of the federal budget with a deficit of 3,8% of GDP (4,1 trillion rubles) in 2020 does not look too threatening, especially considering that last year was the peak of the negative impact of the pandemic.

Although, of course, if we approach the issue from a purely monetarist standpoint, the money from privatization, which allows solving the issue of the budget deficit, can be useful for the Russian economy and ensure its growth, at least in the short term.

but on the other hand

Nevertheless, despite all the advantages for the further development of a competitive market economy in the Russian Federation and, albeit somewhat controversial, but still the prospect of filling the deficit budget, one should not forget that privatization for Russia is a complex and extremely sensitive topic.

The privatization of state property, carried out in the 1990s, still remains one of the most controversial pages in modern Russian history. And this is still the softest assessment of those events.

In fact, the largest state-owned enterprises were then given up for nothing. YUKOS, Norilsk Nickel, Sibneft and a number of other companies have passed into private hands at minimal prices that have been reduced by tens, if not hundreds of times, forever imparting negative connotations to the concept of “privatization” in Russia. Twenty-five years later, the specter of loans-for-shares auctions has not been haunting Russia for a long time. Nevertheless, the experience of privatization in the 1990s can and should serve as a lesson for Russia on how not to get rid of state property.

It is clear that today the "muddy" scheme with loans-for-shares auctions will not be used and the transparency of the privatization process will be much higher. Nevertheless, one must understand that privatization for the sake of privatization will not lead to anything good. Especially in conditions of the constant presence of other factors. Western investors will not rush to pour long-term money into the Russian economy. Sanctions pressure, again, will not go anywhere. The same as the "pandemic" volatility.

State sustainability

One important point is noted in Kudrin's article: “In 2020, due to the pandemic, global GDP fell by 4,3%. For comparison: during the global financial crisis of 2009, the global economy went into negative territory by only 1,7%. At the same time, according to the IMF, the US GDP in 2020 fell by 3,5%, Germany - 4,9%, France - 8,2%. The Russian economy sank by only 3,1% of GDP. "

That is, in fact, at the time of the largest global crisis in a decade, the Russian economy showed itself to be much more stable than the economies of developed countries. In some cases, such as in comparison with France, the rate of decline in GDP was almost three times lower.

So why, taking into account the pandemic that has not ended and the experts of the Central Bank of the Russian Federation predicted (albeit within the framework of an alternative scenario), a large-scale recession in 2023, comparable to the one that was in 2008-2009. and accompanied by a “long period of uncertainty and a protracted recovery,” should privatization be carried out right now?

If the whole world is ahead, and as a result, Russia is waiting for a new global financial crisis, then why “cut the branch on which you are sitting” on the threshold of it, and get rid of what allowed the Russian economy to go through the pandemic with the least possible damage for such a large economy. Why privatize the economy right now? Having lost a share of state participation, companies will not become more stable in a crisis; on the contrary, without a “reliable shadow of the state behind their backs,” their risks will significantly increase.

Summing up, I would like to note that, of course, the new privatization has its own logic. In conditions of stable economic development, lack of capital flight and new sanctions and crisis risks, a decrease in the state's share could theoretically allow the largest Russian state-owned companies to become more flexible and ensure higher growth without compromising competition. However, launching it right now, in the face of extreme uncertainty in the global economy, is a risky step to say the least. However, given the vast experience of Alexei Kudrin and his current post as head of the Accounts Chamber, it is likely that he has much more complete information on this issue, and assesses the current situation from the position of completely different inputs. Time will tell whether his calculations will turn out to be accurate.