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Russia’s Unmanageable State-Owned Mastodons

From a new column by Anders Aslund on Russian economic policy:

Apart from Russia’s excellent fiscal policy, just about everything has been wrong with the country’s economic policy since authorities arrested former Yukos CEO Mikhail Khodorkovsky in October 2003. Shortly after this, Yukos was confiscated. The only significant short-term relief is to free the ruble so it can depreciate. Apart from the very fall in oil and other commodity prices and the international liquidity squeeze, Putin has caused the lion’s share of the country’s current economic problems.

Initially, Russia was hit with a hugeexogenous shock when its terms of trade deteriorated sharply because ofthe sudden fall of oil, gas, metals and other global commodity prices.With current commodity prices, the country’s exports next year couldplummet by some 40 percent in current dollars, or by $200 billion.Budget and current account surpluses will quickly turn into deficits.

Russiais praised for its large currency reserves and its limited domesticleverage, but it suffers from minimal domestic financial intermediationbecause inept state banks dominate the financial market. The statetakes money out of the country, while its big corporations are forcedto borrow abroad, maximizing their currency risk. If Russia hadprivatized its banking system as most other post-Soviet countries, itscompanies would suffer from fewer currency risks.

Putin’s chiefproject has been to develop huge, unmanageable state-owned mastodons,considered “national champions.” They have stalemated large parts ofthe economy through their inertia and corruption while impedingdiversification. In addition, they have financed themselves withforeign loans rather than equity, and this has aggravated the country’scurrency risks.

Russia’s nationalistic energy policy after 2003has stalled the development of major new energy investments (apart fromthe Sakhalin projects, which date back to the Boris Yeltsin era).Gazprom and Rosneft have financed themselves with foreign debt ratherthan with equity capital, accounting for almost one-fifth of Russia’scorporate foreign debt of $490 billion. Gazprom’s aggressive pricingand delivery disruptions have scared away customers, reducing thedemand for its gas.