State Capitalism is weighing down the Russian economy, and there is not much Russian President Vladimir Putin can do to prop up the system, a leading Western expert contends. The trend raises questions about Putin’s ability to maintain his Kung-fu grip on power.
During an early October talk, hosted by the Kennan Institute at the Woodrow Wilson Center in Washington, DC, economist Anders Aslund examined structural flaws in the economic architecture of Russia under Putin.
In Aslund’s view, Russia’s key economic sectors are thoroughly dominated by “state capitalism.” These include energy (oil, natural gas, and electricity); finance (in particular the largest banks, including Sberbank, Agroprombank and Gazprombank); defense (e.g., Russian Technology, United Shipyards, United Aircraft and Rosatom); as well as transportation and telecommunications (Russian Railways, Transneft, and Rostelecom). The companies in these sectors have substantial state ownership, or high levels of direct government intervention.
Aslund, a senior fellow at the Peterson Institute for International Economics in Washington, asserted that most Russian state corporations are extremely inefficient and suffer from poor governance. By international standards, they also have poor market valuation, which hurts the Russian stock market. Many, he added, are “secure monopolies and not exposed to efficiency controls” found in free markets, which explains the high costs of the products produced by Russia’s defense industry. Even so, “most state companies lose out on the market, but seize or purchase assets with state leverage,” Aslund stated during the presentation.
Aslund cast Gazprom, the natural gas giant, as a bellwether for the future of state capitalism in Russian. Natural gas exports are one of the most vital components of the Russian economy, enabling Putin to indulge in vast spending schemes, especially an ambitious military buildup. Aslund described Gazprom’s contributions to state coffers as “the dominant source of rents for the Kremlin.”
But Gazprom’s ability to remain competitive in international markets is coming under extreme pressure. “Where Gazprom Goes, Russia Goes,” Aslund said.
The top threat to Gazprom’s global position is the explosion of shale gas extraction in the United States, which is fostering Washington’s energy independence and causing a dramatic fall in global natural gas prices, especially in Europe, which is Gazprom’s crucial export market. As a result, Gazprom’s profits are plummeting.
To make matters worse for the Russian corporate behemoth, the European Commission in September opened an anti-trust investigation into the firm’s business practices.
“The Commission is investigating three suspected anti-competitive practices in Central and Eastern Europe. First, Gazprom may have divided gas markets by hindering the free flow of gas across Member States. Second, Gazprom may have prevented the diversification of supply of gas. Finally, Gazprom may have imposed unfair prices on its customers by linking the price of gas to oil prices,” said an EC statement. “Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply. Ultimately, such behavior would harm EU consumers.”
Russian officials complain that the EC probe is designed to force Gazprom to lower its sales price in EU markets.
Given the US shale gas revolution and the European anti-trust case, Gazprom faces a prolonged slump. “These and other technological and economic trends will eliminate Gazprom’s profit for a sustained period,” Aslund said.
The best management policy would be to “stop all mega projects such as South Stream,” and divide Gazprom “into separate medium-sized companies” by, for example, carving out Gazprom Transgaz as a separate pipeline company, and selling off its tangential finance, media, and other enterprises.
But Aslund added that Putin is unlikely to authorize such action since it would mean that “the Kremlin’s slush fund would disappear.” Instead, he expected that Gazprom would focus on making and managing gas pipelines “since nowhere else are the opportunities for corruption greater.”
On the plus side, Aslund noted that “if Gazprom no longer delivers rents, the Kremlin has little reason to maintain state capitalism, which may dwindle.”
Richard Weitz is a senior fellow at the Hudson Institute in Washington, DC.