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Starving the Competition

grain0080108.jpgI was disappointed but not surprised to read the front page story on the Financial Times today reporting that Russia is planning on forming a new state company to control more than half of grain exports – theoretically allowing the Kremlin an additional diplomatic-business weapon to drive up food prices in selectively targeted countries. The report states that the country’s Agency for the Regulation of Food Markets could be turned into a a joint stock trading company, gaining control of 28 important storage depots and export terminals, including the country’s biggest at the Black Sea port of Novorossiysk (look out, Georgia). The article speculates that this move is a reflection of Moscow’s reaction to the dramatic rise in global food prices – a panic which was underscored during the lead up to the elections when the government imposed Soviet-style price controls (lest the babushkas become angry at the price of bread and actually vote). Although the consolidation of these state assets is just being considered for the moment with no deadline, U.S. agricultural authorities are strongly critical of this move as being quite damaging to the functioning of grain markets. Others are more sanguine. Analyst Andrei Sizov of Sovecon tells the FT: “This is not a second Yukos.” I completely agree with Mr. Sizov – this is at least the fifth or sixth Yukos, after partial state thefts of Royal Dutch Shell, Russneft, BP, and the work in progress that is Mechel. But who’s counting? We could point to dozens of cases of incrementally increasing state participation in the private sector, usually characterized by an abuse of administrative and legal privilege and anti-competitive conduct. What we are seeing with this move to nationalize grain exports is just the latest expression of a long established and aggressive mercantilist pattern – bureaucrats getting richer under the guise of public interest, while the long-term economic prospects suffer.

There are clearly some dissenting voices within the government regarding the expansion of the state’s role in the economy, and many had hoped that with the election of Medvedev, we might observe a slow reduction in the level of state participation in business. It was just a little over a month ago when Dmitry Medvedev was defending state policy from an onslaught of questions in the midst of the TNK-BP problem, he said thatBut any additional strengthening of the role of the state, increasing its presence in the economy is not foreseen. … On the contrary, we will take action to reduce the presence of the state in the economy.“Similar comments in the past from figures such as Anatoly Chubais and Alexei Kudrin have also backed the position that Russia’s government has gone far enough into the business world, and should step back to let the markets breathe to ensure future GDP growth and continued re-investment.But the first rule you learn in Kremlinology 101 is that you must never assume that there is a unitary consensus over any government decision. The official rationale to consider this consolidation is to manage the assets more efficiently, generate higher profits from rising global food prices, while eventually holding an IPO to raise funds. I agree with one anonymous market source quoted by Reuters, who says that “The aim of creating the company is quite clear. As grain trade becomes attractive, bureaucrats are looking for ways of making some extra money using government resources.“What is evidently on display is the siloviki’s “control mentality” – a comprehensive approach to the public sphere characterized by an extraordinary fear to leave people, ideas, and markets operate free of their hand. This is something we have seen everywhere from the gradual elimination of almost all civil society activity, the obliteration of free press, and the efforts to control the economy itself which was best illustrated by the seizure of Yukos and jailing of Mikhail Khodorkovsky. However markets are not like political dissidents – you can’t just throw them in the gulag or try to strangle them into acquiescence – they don’t react well to manipulation.The Kremlin has had a long good luck streak in its war on markets – seen everywhere from Gazprom attempting to buy all of North Africa’s gas to the preposterous banning of certain imports due to political issues with the exporting countries. This pattern of anti-market interference, especially in the food markets, reveals the fear and vulnerability faced by nearly all authoritarian regimes. If economic problems such as inflation, detailed in a recent paper by Anders Aslund, slip out of their control, then the political model becomes completely untenable in its inability to satisfy public demands for accountability.When I read news like this, I am given the idea that there is a clock ticking down on this post-war amalgam of high GDP growth + repressive rule, and this attempt to add a few minutes to the countdown appears rather desperate and pointless. Future economic and political stability in Russia strongly depends on the state’s willingness to open up and allow both type of competition to flourish once again, so this is not a step in the right direction.