Put the Brakes On Russian Technologies

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Hopefully, First Deputy Prime Minister Igor Shuvalov's revelation on Sunday that the authorities will scale back state involvement in the economy demonstrates the Cabinet's and the president's real intentions. If so, it would signal that Vladimir Putin is indeed determined to keep his repeated promises to reduce the state's role in the economy once the authorities form viable state-owned national champions in key sectors.

Shuvalov's second promise -- that the state will slash the number of so-called strategic enterprises that the state controls or bans foreign investors from controlling -- can only be welcomed as well.

In recent years, the state has sought to assume commanding heights across various sectors of the economy at the expense of private businesses, including foreign investors. In doing so, the government has often resorted to dubious methods, such as crippling back tax bills or threats to revoke licenses from energy projects over violations of environmental laws or any other of the country's complex and often vaguely worded legislation.

In fact, despite Shuvalov's promises, the process of "consolidating" assets in the hands of state-controlled giants continues. Currently, Putin's White House and Dmitry Medvedev's Kremlin are finalizing a list of hundreds of companies that will be transferred to a multisector giant, Russian Technologies. The companies operate in various sectors, so there is little rationale behind their consolidation other than the will of Russian Technologies CEO and long-time Putin friend Sergei Chemezov.

If Shuvalov and other decision-makers do intend to scale back state involvement, a first step would be to prevent the emergence of another state-owned national champion in the form of Russian Technologies. It goes without saying that state-managed companies perform worse than private ones, except in cases when the market economy fails to self-regulate, such as with natural monopolies. This is not the case with Russian Technologies.

As part of the reduction of the state's role, Shuvalov said independent directors would replace federal officials on the boards of state-owned national champions and smaller companies where the government owns shares. This would not improve the companies' performance dramatically. Such replacements may help to reduce conflicts of interest, but they will not make the conflicts go away.

Shuvalov also said state corporations, which include Russian Technologies, must operate transparently and practice good corporate governance. But this would not prevent them from muscling in on private rivals, using their dominant positions and the political links of state-selected board members.

If the authorities are serious about reducing the state's role and improving competitiveness, they should stop fostering state-owned national multisector champions and encourage investment into sectors that would help Russia to diversify away from energy exports.