State Role in Russia Economy at ‘Whole New Level,’ Watchdog Says

(Bloomberg) -- Russia’s state-owned companies have increased their already sizable share in the economy in the past five years despite calls from President Vladimir Putin for increased competition.

A 600-page draft annual report published by the Federal Anti-Monopoly Service found that state companies make up close to or more than half of each of the four major sectors in the Russian economy -- energy, transport, mining and finance. Old-and-gas giants Gazprom PJSC and Rosneft PJSC alone contribute as much as 14 percent to gross domestic product, the report found. State-run banks controlled 66 percent of the banking system last year, up from 59 percent in early 2017.

“All of this means, in particular, that the process of strengthening the role of the state in the economy has transcended to a whole new level,” the report said. The state is now “trying to regulate the economic system of the country, both in the short and long term.”

Stalling Growth

The report warned that the state’s growing role hurt growth prospects by depressing productivity, innovation and the growth of small- and medium-sized businesses. “The economy is starting to ‘spin its wheels,’ which shows up in slower rates of growth and falling further behind technologically.”

State companies are increasingly controlled by their managers, “leading to the erosion of civilized property relations and the ability to realize private property rights.”

Russia’s plans to privatize a raft of state companies have stalled since the 2014 Crimea crisis sank the economy and reduced demand among foreign investors. A 25.7 trillion ruble ($400 billion) investment plan for for the country over the next five years largely focuses on state-driven projects.

The state awarded about 1.7 trillion rubles to state companies in tenders in 2018, about 25 percent of the total, according to the report.

The agency said the state’s share in the economy, including that of Kremlin-owned companies, could be as much as 60 to 70 percent, up from about 25 percent two decades ago.

State Companies

The International Monetary Fund has given more moderate estimates, putting the share of the state and state companies in the Russian economy at around 33 percent. However they noted that the share would increase to more than 50 percent if quasi-state companies are included.

Research by Bloomberg Economics found that the 10 biggest companies in Russia account for about half of revenue, or 20 percent of total spending in the economy. While that’s a lot compared with the U.S., it’s only a bit higher than Germany, they found.

“State procurement favors big players and shields domestic companies against foreign competition,” Scott Johnson, an analyst at Bloomberg Economics in London, wrote in the research note published in October. “On balance, the market power of the mega firms is probably an obstacle to faster growth -- perhaps a big one.”

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