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. Last Updated: 07/27/2016

Greenspan Slams National Champions

NEW YORK -- Former U.S. Fed chief Alan Greenspan on Thursday criticized Russia's national champions as economically harmful and anti-competitive.

Greenspan, one of the world's most respected financial minds, said the very idea of creating industry titans blessed by the state was antithetical to modern capitalism because it protected corporations that were inherently less competitive.

"I don't believe in national champions -- national champions by definition are those which by definition do not maximize profitability," Greenspan said at an investors conference in New York.

He said that the creation of United Company Russian Aluminum -- from RusAl, SUAL and the alumina assets of Glencore -- would indeed produce a giant aluminum company, but he observed that such giant companies do not tend to be innovators, especially if they are protected by the state.

The former chairman of the Federal Reserve also warned of the onset of Dutch disease, an economic malady that affects countries with natural resource wealth.

His remarks came in stark contrast to a largely upbeat assessment from Renaissance Capital CEO Stephen Jennings.

"Russia is also building national champions, in oil and gas, metals and mining, transportation, defense, aerospace, machinery and nuclear power," Jennings told the conference, sponsored by RenCap Securities. "It's building these industries in a different manner and by different means than it is done in the U.S. and Europe today, but ultimately with the same effect and purpose: governments supporting financially and politically industries they deem 'strategic.'"

Oil, gas and aluminum are classic 20th-century industries, and Greenspan said Gazprom would have done better to follow through with its plans to produce liquefied natural gas, a newer technology that would be more competitive in the 21st-century economy.

"Competitiveness will not come from the large companies -- it will come from the medium size," he said.

Greenspan said Russia's heady rate of GDP growth could help its economy resemble Western Europe's in the near future, as long as the Kremlin avoided certain missteps.

"If it weren't for this national champion issue, which I find very disturbing, ... it could close the gap on Western Europe very quickly," he said.

In response to an investor's question, Greenspan acknowledged that the governments of European countries and even the United States could be protective of certain large, successful industries that lie within their borders.

"It's the same malady, but I'm just fearful that Russia's got a deeper virus than the rest of us," Greenspan said. "The Russians are just doing it with a little more fervor."

Besides the national champions, Greenspan warned of the dangers of Dutch disease, in which a country with natural resource wealth experiences a sharp rise in the value of its local currency, strangling the competitiveness of other industries, especially manufacturing.

But he praised the work of his "friend," Finance Minister Alexei Kudrin, in keeping oil revenues flowing to foreign reserves and the stabilization fund, where they are effectively "sterilized" from having a damaging effect on other parts of the economy.

Besides Central Bank intervention in the currency market, Greenspan said the best defense against Dutch disease in the past had been a large, healthy economy diversified away from natural resources. "Russia is somewhere in the middle on this issue," he said.

Greenspan said Russia's economy continues to be hobbled by an underdeveloped banking system, partly as a result of the small role of banks during Soviet times.

In addition to a couple of large, state-controlled banks, Russia is filled with a "very large group of institutions which are called banks, but I'm not sure what they are."

The banking sector will benefit from the death of these financial institutions, as well as the growing presence of foreign banks in Russia, he said.

"They will spread 21st-century banking throughout the Russian system," Greenspan said of the foreign banks. "Remember, they operate under Russian law -- this is not a foreign invasion." Foreign participation in the financial sector has been a contentious point in Russia's negotiations to join the World Trade Organization.

In all, Greenspan struck a cautiously optimistic tone on the future of the Russian economy, assuming the people and their elected representatives eventually recognize the folly of establishing national champions.

"I trust that in the years ahead the Russian people will see that is the case and venture forth with the type of economy which they deserve, finally," he said.