MOSCOW BLOG: Fitness training for dinosaurs

By bne IntelliNews October 15, 2015

Chris Miller in Moscow -


Though Vladimir Yakunin was sacked from his post as head of state-owned Russian Railways back in August, the shock is still reverberating through Russia’s biggest and most powerful companies. A long-time friend of President Vladimir Putin, Yakunin was thought to be one of the most influential people in Russia. But Yakunin is now out of favour and out of power.

Rumours are swirling as to the cause of Yakunin’s downfall, which Russian media reports linked in part to his son’s decision to take British citizenship. That may have been one step too far at a time when Russia is focused on confronting the West. Yakunin himself felt compelled to deny publicly any relationship between his firing and his son’s citizenship.

Yet part of Yakunin’s problems appear to stem from his management style, or lack thereof. Yakunin’s method of running the railways incurred many enemies, and allegations of corruption swirled around him. Those familiar with Russia’s state-owned firms will not be surprised to hear claims of rigged procurement contracts and money laundering. Whether fairly or not, such allegations seemed to stick to Yakunin more than to others.

State-owned firms are on the defensive as the political winds shift against them. Yakunin’s downfall sent a message to all of Russia’s state-owned firms, especially as Yakunin was not the only casualty. Evgeny Dod, former CEO of RosHydro, an electricity company, was also pushed out in September, again following allegations of poor performance.

This provided a political opening for Russian leaders who want more efficiency and less state capitalism. In a series of high profile speeches in recent weeks, key economic officials have argued for a new wave of policy changes to cut waste at state-owned firms, reducing their drain on the budget. For example, former finance minister Alexey Kudrin, who has long been a trusted advisor to the president on economic questions, recently argued that Russia faces a “problem of large state companies, whose interests are dominant” in the economy. That should change, Kudrin believes.

Kudrin’s calls for reform of state-owned firms has been echoed by other top leaders, including Prime Minister Dmitry Medvedev, Minister of Economic Development Alexey Ulyukaev, and Finance Minister Anton Siluanov, who declared: “We have a state economy, in essence, and we are now supporting this state economy through the budget, which is absolutely wrong.”

The economic bloc in the government has been advocating cuts to the state sector for a decade with few tangible results. But Siluanov’s statement illustrates why that may now be changing. When oil prices were high, and the budget was flush with cash, it was easy for the government to ignore when state-owned companies – often run by the president’s friends – wasted money. Now, however, the government is struggling to keep its 2016 budget deficit below 3% of GDP, a target that will require painful choices. Efficiency at state-owned companies is no longer a choice – it is a matter of financial stability.

Russia’s leaders have previously made grand claims about efficiency, but state-owned firms often avoided real change. Will this time be different? In several important ways, it already is.

Balancing the books

Take investment policy. After Western sanctions cut off many large, state-owned firms from international capital markets, they turned to the country’s National Wealth Fund to finance their investment. The total requests to the fund were far higher than the fund’s resources. Yet most of these requests were denied. Even state-owned firms run by influential figures, such as Rosneft’s Igor Sechin, failed to attract significant new financing from the sovereign wealth fund. The government’s message to these firms is that in a time of austerity, they need to help balance the books.

Now the government is pushing state-owned firms to use e-procurement methods, which reduce the scope for corruption or rigged contracts. Ministers are redoubling efforts to make state-owned firms sell minority stakes on the stock market or to shed non-core assets. The government is also hiking taxes on the oil and gas sector in a manner that will place the heaviest burden on Gazprom, the natural gas export monopoly. In the past, Gazprom got tax favours from the government; now it is being asked to carry more weight.

Indeed, even Russian Railways – Yakunin’s former fiefdom – faces demands for greater efficiency. The Ministry of Economic Development proposed splitting Russian Railways into two separate companies. President Putin himself has backed moves toward change, declaring that the question of “de-monopolizing rail transport is overdue”. 

Whether and how that comes to pass, of course, will depend on much political manoeuvring. And the state-owned companies are masters of Moscow’s political games. But no amount of political clout can sidestep the fact that the budget deficit needs to be reduced and spending needs to be cut. So long as state-owned firms keep drawing big government subsidies, waste money and underpay on their taxes, they will find themselves in the spotlight. As austerity begins to bite, Russia’s state-owned firms are facing increasing pressure to shape up. 

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