Is diversification possible?

Russia needs competition, not government investment

Structural restructuring of the Russian economy does not require budgetary injections into unpromising projects, but the establishment of basic rules of the game and stimulation of competition.

Over the past two crisis years, the Russian authorities have constantly addressed the problem of diversifying the domestic economy. Both the president and the prime minister quite often talk about the need to end Russia’s dependence on raw materials. There is talk about modernization, an innovative breakthrough, a technological leap. The good wishes of representatives of the establishment can be understood: everyone would like to see demand on world markets not only for oil, gas and metals, but also for the products of the domestic manufacturing industry, as well as innovative goods and technologies produced in Russia. The question is how to achieve this goal.

The actions of the Russian authorities, frankly speaking, do not always contribute to solving this problem. Thus, a hasty ban on the export of grain in the very near future will hit agricultural producers and will block Russia’s access to its usual niches in the global agricultural market, which will ultimately negatively affect the volume of domestic non-resource exports. This example speaks to the government’s tactical mistakes, which can be corrected in a relatively short time. Despite the fact that the Prime Minister recently extended the export embargo until September 2011, this ban will sooner or later be lifted, and Russia will be able to restore its position in the world grain market.

Things are worse with strategy. In the second half of the 2000s, one of the key instruments of the government’s industrial policy (the need for its implementation began just in the middle of the last decade) was the creation of various kinds of economic structures, the purpose of which was to stimulate innovation activity and structural restructuring of the economy. The first sign was the state investment fund, formed in 2005 and intended to co-finance infrastructure projects. In the first three years of its existence, the investment fund participated in the financing of 20 federal projects with a total value of 1 trillion rubles, a third of which was allocated from the state treasury. In 2008, the fund was repurposed to implement regional investment projects, of which there have been 23 over the past two years. In general, despite the subjective nature of project selection and the lack of firm guarantees that the state will fulfill its obligations, the investment fund has become an important instrument of public-private partnership. At the same time, the authorities seem to have lost faith in the effectiveness of this mechanism: after 2008, not a single federal project was launched, and rather modest funds were allocated for the construction of regional infrastructure.

The next stage in the implementation of industrial policy was the creation of state corporations (SCs). Let me remind you that state corporations are not at all an invention of the 2000s: this organizational and legal form was first defined in the late 1990s in the law “On Non-Profit Organizations”. The first structures that received the status of state corporations (the Agency for Restructuring of Credit Institutions and the Deposit Insurance Agency) were instruments of regulation in the banking sector. In 2007, six large state corporations were created, which received a significant amount of state property at their disposal. Unlike the first half of the 2000s, state corporations were given a colossal amount of tasks - from providing financial resources for relocating citizens from dilapidated housing (Fund for Assistance to Housing and Communal Services Reform) and implementing a program for the construction of sports facilities in Sochi (Olympstroy) to implementing material and organizational support for projects in the nanoindustry (Rusnano).

The largest state corporations were Vnesheconombank, created by merging the transformed Bank for Foreign Economic Affairs of the USSR and the Russian Development Bank, and Russian Technologies, which united about 450 companies from various sectors of the defense industry. At the end of 2008, the supervisory board of Vnesheconombank (the chairman of which is the prime minister, and the rank and file members are the entire government presidium) approved the participation of the state corporation in the implementation of more than 20 large projects worth about 200 billion rubles. Over the period since its founding, the state corporation has concluded cooperation agreements with a number of federal authorities, regional administrations and the largest state-owned companies (Russian Railways, Rosneft). In the midst of the economic crisis, Vnesheconombank became an instrument for ensuring the stability of the financial system: the state corporation acquired stakes in Russian credit institutions (for example, 98% of the shares of Svyaz-Bank), and also provided large long-term loans to specialized banks (VTB, Rosselkhozbank).

Today, the largest state corporation is the Russian Technologies State Corporation. Simultaneously with its creation (in July 2007), a decision was made to transfer to it 100% of the shares of the OJSC created on the basis of the Federal State Unitary Enterprise Rosoboronexport. Then, in May 2008, large stakes in three airlines were transferred to the state corporation to establish Airunion OJSC (the company went bankrupt three months later). Finally, in July 2008, the assets of Russian Technologies became 183 joint-stock companies created through the transformation of federal state unitary enterprises, as well as 243 operating joint-stock companies. As a result, as mentioned above, the Russian Technologies State Corporation unites more than 450 (!) enterprises of various forms of ownership. This is an abnormally large number. Suffice it to say that none of the Soviet ministries had more than 300 enterprises: the sixty-year-old “strong business executives” who headed the departments were convinced that it was impossible to manage a larger number. The situation is aggravated by the fact that with the onset of the crisis, most of the assets of Russian Technologies effectively became bankrupt. From this it is clear that the main goal of the leadership of the Civil Code is not the restructuring of defense industry enterprises, but the development of budget funds.

So, what is different about the industrial policy pursued by the government over the past five years? Firstly, the identification of priority industries based on arguments that are often not based on an analysis of competitiveness factors; secondly, intervention in the market structure of the industry with the aim of creating companies with 100% state participation in ownership; thirdly, reliance on budget subsidies and lending to enterprises in priority sectors; fourthly, a protectionist course in foreign trade, aimed at creating greenhouse conditions for national producers.

The Russian Cabinet of Ministers did not become a pioneer in the use of these methods. Similar measures were implemented in practice by Latin American countries, which pursued a policy of import-substituting industrialization in the 1950s-1970s. This policy led to significant expenditure of economic resources on the development of manufacturing industries, which never reached world standards of competitiveness and therefore required continuous government support, as well as to an increase in government spending on economic projects, which provoked an increase in inflation and the accumulation of public debt. The international debt crisis of the early 1980s actually put an end to the import substitution policy, which was based on the methods of strict industrial policy.

As a result, in the last two decades of the 20th century, soft industrial policies replaced hard ones. International financial organizations began to direct governments of different countries to create basic rules of the game and competitive conditions that facilitate the implementation of entrepreneurial initiatives and the market identification of leading industries. According to World Bank experts, creating a favorable business climate and eliminating bureaucratic barriers are necessary prerequisites for realizing the potential comparative advantages of a country.

The state must modernize transport (in order to reduce the costs of access to markets for products), utilities (to ensure the life of settlements in which economic facilities are located) and educational (accumulation of human capital) infrastructure.

The Russian government indirectly acknowledges the fact that budgetary injections into state megaprojects will not lead to successful restructuring of certain industries. Confirmation of this is the long-suffering AvtoVAZ. The auto giant's restructuring program, adopted after the arrival of General Director Igor Komarov at the plant, involves the removal of Russian Technologies from management, the abandonment of restrictions on the subsequent integration of AvtoVAZ into the Renault-Nissan alliance, and the removal of all social infrastructure from the enterprise (hospitals, rest homes , hockey and football teams), dismissal of a significant part of the staff. Time will tell how successful this program will be, but we can already say with confidence that the multi-billion dollar injections into AvtoVAZ made during the first crisis year have gone down the drain.

Another evidence of the authorities’ recognition of the need for basic economic freedoms and competition is the Skolkovo project. To implement it, a special law was adopted, according to which on the territory of 400 hectares where the innovation city is to be built, many norms of Russian legislation regarding the powers of law enforcement agencies and various types of supervisory authorities will not apply. It seems that even conservative-minded Russian bureaucrats are gradually realizing that structural restructuring of the economy and stimulation of innovative activity requires a qualitative improvement in the institutional environment and the development of competition.

Kirill RODIONOV, employee of the Institute for the Economy in Transition