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. Last Updated: 07/27/2016

Investment Rule Changes No Panacea

As Russia moves toward a market-based economy, changing the way the country invests in industry is proving among the toughest challenges the government faces.

The present credit policy, inherited from the Soviet Union, has the government granting cheap loans to industry on a purely discretionary basis. As a result, the money tends to flow to those companies with the most vocal unions, or with the best connections to bureaucrats in Moscow.

So far, only tentative steps have been taken toward changing this outdated system. The Central Bank, for example, has set up a pilot program in which it auctions centralized credits to commercial banks and enterprises throughout the country. But the auctions offer only three-month credits when enterprises need much longer-term loans to finance restructuring.

So the announcement by Economics Minister Alexander Shokhin last week that the government is developing a "competitive mechanism for the allocation of credits" that would place much more responsibility for granting credits on commercial banks came as a welcome move.

The mechanism would essentially seek to leverage the government's investments into the economy by asking enterprises to come up with 80 percent of funding for new projects on their own. Commercial banks would be responsible for selecting viable investment projects to present to government officials, who would then judge them based on merit.

In an ideal world, the mechanism might work. In Russia, the actual impact of the government's latest sally is likely to be nil.

First, Russia's commercial banking industry is neither ready nor willing to play the role assigned to it. Banks, many struggling under the weight of nonperforming loans, are more interested in making quick profits on securities and currency markets than in financing long-term investments.

Second, ultimate authority for granting loans still would still lie with the government, meaning that the industrial lobbies' influence would not diminish. The increased role of commercial banks would not make the process more impartial, since many of the country's largest banks were set up by the same enterprises that have long had their hands in the government's cookie jar.

The real key to changing the way Russia finances industry will not come in any package of decrees, but in a stabilization of the economy that would make long-term lending a reasonable risk. On this score, the government has already come a long way by adhering to a tight monetary policy that has cut inflation to less than 5 percent a month.

If it keeps up the good work, commercial banks will willingly, and profitably, take up responsibility for lending to industry.