Leaders commit to market with state control set to go beyond 50%

Russia is preparing for a new wave of privatization according to Prime Minister Vladimir Putin. The move could help not only improve Russia’s budget outlook, but also its image.

Addressing more than 800 top foreign and local investors at VTB Capital's forum on Tuesday, Prime Minister Putin underlined Russia’s commitment to a market economy, despite concern that the State’s role has been massively boosted over the past year, as it has sought to shield corporate Russia from the direst effects of the global financial crisis and economic downturn

“Despite the crisis we are not looking back towards large scale nationalization, or a shift to increased regulation, and this hasn’t occurred. We have kept capital flows free, and the Rouble convertible. This is a sure sign for investors. We are not returning to the past. Russia will remain a liberal market economy.”

Finance Minister, Aleksey Kudrin, echoed the sentiment. But although he concedes the State is currently in effective control of half the economy, and referred to reducing State involvement as a key goal, he alluded to the possibility it may come into control of still more in the short term.

“The government may increase its stake in problematic companies in the auto and defense industries, but for a very short term – one to two years. After that we will offer them to private investors."  

The banking sector, where the State controls the top two players – Sberbank and VTB – has traditionally been seen as the one area where it will maintain its control. But the head of VTB’s retail-banking arm, Mikhail Zadornov, says the state may soon sell its stake in the bank.

“Depending on further development of the markets, a certain part of VTB shares will be sold to investors on the market. Time will tell when it will happen, but this will happen in the foreseeable future.”

Russia is facing its first budget gap in more than a decade. Selling state assets would help narrow – if not cover – this deficit. But the overt statements by Russia’s leadership, that it remains committed to the substance of a market economy in the short to medium term, echo recent comments by President Medvedev pushing for a more vibrant private sector.  They will also help to ameliorate suspicions that rebounding crude prices – which add first to state coffers – could enable it to avoid market discipline for some time to come, and the possibility that key players may not understand the efficiency dividend that a robust private sector could provide.