Russia needs new wave of privatization to slash public sector & sell off ‘inefficient’ state companies – Putin confidant Kudrin

From farm equipment to nuclear warheads, Russia’s state-owned companies operate in virtually every industry. Now though, facing a global economic downturn, one of the country’s top finance chiefs says it’s time for a major change.

Writing in an article published by Moscow’s Kompaniya journal on Monday, Alexey Kudrin, the head of Russia’s Accounts Chamber who has close links to the Kremlin, said that the growing role of the public sector is a worrying sign in a world recovering from the disruption of Covid-19.

“In 2020, due to the pandemic, global GDP fell by 4.3%,” he said, comparing that to a drop of only 1.7% during the 2009 financial crisis that battered the Russian economy.

However, Kudrin said, the country’s markets had weathered coronavirus better than countries like the US, Germany, France and the UK, seeing its economy shrink by a smaller fraction. A key reason for this, he argued, is “the significantly smaller share of small business and the service sector, with a high degree of nationalization of the economy.”

Now though, the finance chief wrote, the high level of state involvement may start holding growth back, given that public sector companies are usually less efficient and “less flexible in terms of management,” as well as “highly dependent on the bureaucratic machine.” This, he says, “negatively affects the speed of decision-making and the setting of breakthrough goals that change the company’s direction of travel.”

Kudrin served as the country’s finance minister for over a decade from 2000, as well as in St. Petersburg’s post-Soviet administration alongside the future Russian president, Vladimir Putin.

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Public firms are also less profitable, he added. Only four of the country’s top 10 largest companies are private, but 97% of all tax receipts come from the same 20 businesses. “The main reason is weak governance,” he claimed.

“The situation can be improved by privatization, which will give enterprises effective owners,” Kudrin stated. “The financial benefit of privatization cannot be denied, especially now, when additional funds are needed for new strategic initiatives, they can be obtained without resorting to an increase in tax, but simply by systematically selling part of the state-owned shareholdings.”

Russia sold off swaths of state-owned infrastructure and industry after the collapse of the Soviet Union and throughout the 1990s. However, while the initiative was billed as a campaign to modernize the economy and rescue it from collapse, without transparent and robust measures in place, many valuable assets were picked up by politically connected investors for a fraction of their worth, giving rise to oligarchs who then dominated the country’s institutions for years.

Moscow is still locked in a long-running legal battle with the former shareholders of the Yukos oil and gas empire, founded by disgraced ex-oligarch Mikhail Khodorkovsky. The tycoon, who now lives in London, bought the former state enterprise along with his associates for a mere $170 million, when its true worth was estimated to be around $5 billion, in what one economic adviser dubbed “the swindle of the century.”

In 2016, the Kremlin had reportedly earmarked a list of state businesses – covering sectors including telecommunications, energy and aviation – to be offered to private bidders for a total of $12.8 billion in the first round of selloffs. However, the government still owns controlling stakes in many of the businesses in which shares have been sold.

In addition, the country's sizable defense industry is almost entirely nationalized, with a network of publicly-owned companies catering to the needs of the military and producing tanks, missiles and firearms.

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