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. Last Updated: 07/27/2016

OECD Criticizes State Role in Market

The government needs to reform its often corrupt and weak bureaucracy and reverse the trend of increasing state expansion into the private sector, which is slowing down the economy, the Organization for Economic Cooperation and Development said Monday.

Increasing state control of the oil, finance, aviation, power-generation and other sectors is "disturbing" and makes the economy more prone to corruption and corporate governance risks, the OECD said in its sixth biennial economic report on the country.

"For the long term, this is quite disturbing," OECD senior economist William Tompson said at a presentation of the report.

Under President Vladimir Putin, the Kremlin has blessed the creation and expansion of several state-controlled national champions in the oil, gas, aviation, banking, telecommunications and automotive sectors, all of which it deems strategic. The trend started with the onslaught against oil firm Yukos and has subsequently grown, becoming "unmistakable," the report said.

Tompson said the problem was that "the definition of strategic is a bit elastic" as state officials often used the resources at their disposal to pursue their own ends.

"In many cases ... state companies engaged in mergers and acquisitions activity appear to be pursuing their own ends, even where these contravene government policy," said the 216-page economic assessment.

"This bodes ill for Russia's growth prospects."

Tompson indicated that the political will to rein in state officials might be lacking.

"It remains to crack the whip," Tompson said on the sidelines of the presentation.

He declined to elaborate, saying further comments would effectively mean commenting on the country's politics.

To list all the major state acquisitions in the past two years, the report had to use a small font as there were so many of them, said Andreas W?rg?tter, one of the report's main authors.

The OECD said in the report that of particular concern was Gazprom's "seemingly insatiable appetite." Tompson referred to the gas giant as a votchina, or fiefdom. Instead of disposing of noncore assets, Gazprom "goes on a frolic" buying into everything from newspapers to energy, he said.

In Gazprom's most recent media foray, it said last week that it planned to buy Komsomolskaya Pravda, the country's bestselling tabloid newspaper.

Even when the report had praise for the government's economic achievements, it added words of warning along with the faint pat on the back.

"The achievements of the last two years have been modest, despite a favorable economic and political context," the report said.

"The inefficiency and corruption of the state administration impose a heavy burden on business and limit the government's ability to implement any policies that make significant demands on the state's administrative or regulatory capacities."

Oleg Zasov, deputy director of forecasting at the Economic Development and Trade Ministry, defended the Kremlin's moves to increase its control of the oil and gas industry, saying at the presentation that the state involvement "was just reconsolidation of assets."

In the case of non-energy assets, the state was acting as a "crisis manager," Zasov said, repeating the formula used by Putin to describe the takeover by state arms trader Rosoboronexport of ailing carmaker AvtoVAZ last December.

The government needs to start reforms in earnest as the economy is losing the competitive boost it received from the devaluation of the ruble after the 1998 economic meltdown, the OECD said.

"Although Russia continues to grow at relatively high rates, the main factors underpinning current growth are transitory," the report said.

"The gains in competitiveness that Russian producers enjoyed after the 1998 financial crisis have now more or less disappeared."

The government needs to run a tight fiscal ship and should strengthen the oil-funded stabilization fund by boosting the size of its "insurance" component to around 10 percent of gross domestic product for three to five years to insure against a sharp drop in oil prices, the OECD said.

To develop the economy further, the government needs to ensure sound macroeconomic management as well as improve three key areas: public administration, innovation policy and healthcare, the OECD said.

Of the problems the economy faces, those in public administration are perhaps the worst, Tompson said.

"The poor work of officials every day creates problems for the public and for businesses," he told reporters, adding that such bureaucracy was deterring much-needed foreign investment.

The report also criticized the government's allocation of healthcare expenditure and said it was "inefficiently administered."

In another recommendation, Tompson said an effective freedom of information law would be an important step in empowering citizens, and added that he was puzzled about why it was taking so long to pass such legislation.

Vladimir Pantyushin, an economist with Renaissance Capital investment bank, said the survey was a "good road map" for government officials eager to press ahead with reforms.

The government was already implementing some of the report's recommendations, such as putting an increased focus on innovation and the creation of free economic zones, Pantyushin said.

The OECD said the government should not only earmark money for research centers and free economic zones but also needed to follow through with structural reforms.

"Indicators of actual innovation activity remain disappointing," the survey said, adding that private-sector involvement remained limited. More needs to be done to protect the intellectual property of Russian scientists and academics, the report said.

"In too many cases, a good deal of money is spent" on innovation without it leading to reforms, said W?rg?tter, who co-authored the report.

"Science continues to live a life of its own," Tompson said. "Business doesn't understand science; science doesn't understand business."

Stanislav Naumov, head of the economic analysis department at the Industry and Energy Ministry, took issue with that statement, saying the report had used out-of-date information. The ministry was cooperating with about 10 research centers and was looking to work with another 20, Naumov said by telephone.

"The state-science-business equation is now shaping up," he said.

OECD RECOMMENDATIONS



Economic policy

Maintain tight fiscal policy to curb inflationary and exchange rate-appreciation pressures. Do not over-rely on nominal exchange rate appreciation as an anti-inflation weapon.

Establish a clear fiscal rule targeting a sustainable medium-term position for the non-oil budget.

Widen scope of budget stabilization fund so that it gathers windfall revenues from gas exports.

Peg the "insurance" component of the stabilization fund to around 10 percent of GDP; establish firm rules to invest the surplus funds in riskier, income-generating assets.

Energy sector:

The OECD criticizes growing state intervention in "strategic" sectors of the economy, in particular energy.

It warns that failure to restructure the gas industry could jeopardize the sustainability of natural gas supplies. Independent producers should be granted access to Gazprom's pipeline network.

Gazprom's acquisition of assets in the electricity generation sector threatens to undermine reforms to create a competitive power market.

Business and innovation:

Cut red tape.

ncrease protection of intellectual property rights.

Provide a more favorable tax regime to encourage research and development.

Administrative reform:

The government must renew efforts to boost the efficiency and accountability of its weak and often corrupt public service.

Strengthen rule of law.

Adopt freedom of information legislation.

Boost legislative and administrative oversight.

Separate state's role as owner and regulator.

Healthcare reform:

Confront Russia's public health crisis by boosting primary healthcare and cut its reliance on treatment by hospitals and specialists.

Strengthen the insurance component of Russian health provision, boost competition among providers.

Source: OECD

-- Reuters