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. Last Updated: 07/27/2016

OECD Warns of State-Run Economy

Growing state involvement in the oil and gas industry, the engine behind Russia's booming economy, may erode efficiency and slow growth, the Organization for Economic Cooperation and Development said Tuesday.

"Greater state control over resource-exporting industries is likely to lead to less efficiency, more rent-seeking and slower growth in the very sectors that have been driving growth in recent years," the OECD said in its economic outlook.

The OECD, a club of the world's 30 most developed economies, also echoed concerns of many investors and analysts, saying the impetus for economic reform appeared to have run out of steam over the past year.

The election of President Vladimir Putin to a second term in March had given rise to hopes he might use his new mandate to force through a flurry of measures to shake up giant gas and electricity monopolies, Gazprom and UES.

"Structural reforms appear largely to have stalled in 2004, not least as a result of delays arising from the overhaul of the federal executive," the OECD said.

"Electricity reform has slowed markedly, with many decisions being delayed, and there is little sign of any readiness to advance gas-sector reform," the report added.

The purchase by Gazprom, the world's largest natural gas company, of state oil firm Rosneft and of shares in Russian power concerns were worrying signs of a strengthening of the state's presence in the economy.

"The implications of Gazprom's acquisition of the state-owned oil company Rosneft ... are mixed at best, as are its ambitious plans for expansion into the power sector as well," the OECD added.

In a further sign of state encroachment on the oil industry, which has been mostly in private hands since the 1990s, Gazprom said on Tuesday it would bid for the main production unit of stricken oil company Yukos. The government has ordered the sale of Yuganskneftegaz, a Yukos subsidiary producing one million barrels of oil per day, to help recover $20 billion in outstanding tax claims.

Russia's gross domestic product, forecast by the OECD to grow by 6.4 percent this year, was expected to cool in the coming two years, with growth of 5.5 percent penciled in for 2005 and 2006.

But the economy could hit the skids if there is an unforeseen worsening in the international economic environment.

"Pressure for further fiscal easing, lack of progress on structural reforms and a worsening investment climate point to downside risks, which would be exacerbated should the terms of trade become less favorable," said the report.

Inflation in 2004 was forecast at 11 percent, above the government's 8 percent-10 percent target, and the OECD saw little chance of a sharp slowdown in price growth in 2005 with inflation of 10.5 percent on the cards.

A big surge in capital flight "which reflects, among other things, a deterioration in the investment climate" had helped the authorities contain inflation while preventing rapid currency appreciation.

Next year's budget signaled a loosening in Russia's tough fiscal stance, which has delivered several years of strong surpluses. "Such fiscal loosening breaks with the practice of recent years of ensuring that budgets would balance at long-term average oil prices," the OECD added.