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State companies to shape up or privatize out

President Medvedev has called for a shake-up in the state sector, pledging to privatize state companies or close them, amidst plans to reduce state ownership by encouraging innovation.

In his annual address to the parliament, Medvedev said state companies would have to prove they are efficient – before they get any more state aid.

“Industries should no longer rely on massive bailouts and rescue packages. During the crisis we are providing direct support to Russian companies. The volume of that support has exceeded 32 billion dollars. In the future we will only help those companies that have clear plans on how to increase efficiency and how to implement high technology projects. Inefficient companies should undergo a process of financial recovery or leave the market.”

The President reinforced the message that the state's direct involvement in the economy should be significantly reduced from the current level by 2012, adding that the concept of state corporations had proved ineffective and they would be restructured.

“I consider the form of state corporations generally has no prospects in today’s conditions. Corporations with a legally endorsed lifespan must be wound up when their business is done. Corporations operating in the commercial competitive environment should be turned into joint-stock companies.”

Presidential aide, Arkady Dvorkovich, identified the first corporations to be turned into joint-stock companies next year.

“Vnesheconombank (VEB) and Rostechnology will be turned into joint-stock companies under government control. Later, some of the assets they control may be sold to private investors. Initially we had an idea to consolidate a series of assets, package them and make them more attractive for investors to create competitive companies that later could become private. Now this process should be accelerated.”

There are 7 major Government corporations in Russia including VEB, Rostechnology, Rosnano, Rosatom, the Fund for Housing and Community amenities, The Agency for Deposit Insurance and Olimpstroi. Dvorkovich said that some of those created for specific purposes would not be privatized but closed when their original mandate ended.

“There are such government corporations that were formed to solve certain problems within a strict framework – these are Olimpstroi and the Fund for Housing and Community amenities. They are probably to be closed when their authority expire.”

Aleksey Moiseev, Managing Director at Renaissance Capital, believes the restructuring process state companies will have a limited impact on investment sentiment until further details are announced.

“I think, President Medvedev, being a lawyer by education, just decided to put things in order, as in Russia’s legislation there’s no such category as “Government corporation” and a lot of issues about their work remained vague for most people. For example, who controlled it, what its functions are, etc. However, the new status won’t change much in economic terms. The same situation was with Vnesheconombank, which for a long time conducted a bank’s functions without a banking license.”