Private Sector Is Best Engine for Growth

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Russian Railways has expressed an interest in bidding for the huge Udokan copper field in Siberia. This is another example of how the government's economic policy is increasingly shifting from free-market reforms to the creation of gigantic, state-controlled "national champions."

The government's rationale for shutting down the Soviet-era Ministry of Railway Transportation and, in its place, establishing joint-stock company Russian Railways was to overhaul the loss-making industry and attract much-needed investment for its aging infrastructure.

The government's restructuring plan also foresees the divestment of the monopoly's various businesses into separate companies, including an independent unit for passenger travel.

Russian Railways, which has been led by President Vladimir Putin's close friend Vladimir Yakunin since 2005, should be commended for coming up with an ambitious strategy for attracting investment to reform the industry. This state-owned company's management should also be commended for taking important reform measures, such as the recent formation of two subsidiary cargo companies, which will be partially privatized.

But the ambitions of Russian Railways' management should be limited to the railways industry. If the company itself doesn't realize that buying copper fields should not be part of its modernization strategy, than the government, which controls this company, should intervene.

The proper role of government is to regulate monopolies, including controlling their costs and preventing them from acquiring excessive power and influence. If the government has any appreciation for market efficiency, its representatives on Russia Railways' board of directors should veto the company's bid for the copper field and any other noncore assets. Otherwise, it would appear that the goal of Russian Railways is to build another state-controlled behemoth a la Gazprom, which, in the absence of much-needed cost controls, has also been allowed to acquire a mind-boggling number of noncore businesses in such sectors as telecommunication satellites, television, farming and medical clinics.

If Russian Railways is successful in acquiring the Udokan copper field, it will be another feather in the cap of those Kremlin strategists who believe that huge state-controlled companies are essential to strengthening the country's state capitalism.

Unfortunately, in pursuing this flawed economic model, the Kremlin is forgetting the mistakes made by the Soviet central planners. True economic growth and development is possible only when there is a thriving private sector that is able to function in a transparent and free business environment that is governed by the rule of law.

Private enterprise is the true engine of economic growth, not huge, unwieldy and inefficient state-controlled conglomerates.