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. Last Updated: 07/27/2016

Kremlin Aide Warns of State Control

Itar-TassArkady Dvorkovich
The Kremlin's top economic adviser, Arkady Dvorkovich, on Wednesday warned against the creation of more state corporations as a way to boost economic growth.

"I view the fashion of creating state corporations as being extremely dangerous, particularly for the industries being proposed," he said at a business forum, Interfax reported.

President Vladimir Putin has blessed the creation of several state corporations to run such industries as aircraft manufacturing, shipbuilding and nanotechnology in recent years. The latest on the list is Russian Technologies, a corporation that would seek to develop heavy industry. The State Duma is to consider a bill to set up the corporation later this month.

Rosoboronexport chief Sergei Chemzov, a close ally of Putin, is widely expected to head the new corporation.

But Dvorkovich, who heads the presidential administration's experts department, referred to proposals from government ministries in recent months that called for corporations to run the fishing industry, build roads and produce medicine.

"That makes you think that the state is not even trying to understand that private business could do all of that," he said. "It's a path toward setting to nil the growth of the Russian economy."

The majority of people in the government, Dvorkovich said, realize the importance of private business. "But risks do exist as well," he said.

The country does not have any more industries that qualify as obvious candidates for the creation of state corporations, said Ronald Smith, head of research at Alfa Bank.

"His comments make perfect sense," Smith said of Dvorkovich. "I would be heartened to find that opinion exists and is expressed at high levels in the government."

Yaroslav Lisovolik, chief economist at Deutsche Bank in Moscow, said Dvorkovich was sending an important signal to investors that the Kremlin understands the risks of overindulging in state control. The promotion of Finance Minister Alexei Kudrin to the post of deputy prime minister serves, in a way, as a check on these risks, he said.

But government control of such a sector as aircraft manufacturing is essential for its survival, Smith said. United Aircraft Corporation brought together several plane makers, and one of its units plans to begin deliveries of a new midsized passenger jet, the Sukhoi Superjet-100, next year. "The industry probably wasn't going to rescue itself. It takes too much capital, too much coordination. It's indeed very, very big business," Smith said. "And there probably wasn't any other organization of that scope and scale to come in and rescue these companies any time in their future."

Dvorkovich joined a growing list of those criticizing state control over sectors of the economy. Several oil company chiefs have begun to speak out against what they say is harmful state control of the energy industry.

Vladimir Bogdanov, the chief executive of Kremlin-friendly oil firm Surgutneftegaz, entered the fray last week, saying increasing state participation in the sector would hinder competition. Speculation has long swirled that Surgutneftegaz, the country's fourth-largest oil producer, is ripe for takeover.

"The growing strength of state companies is a concern," Vagit Alekperov, chief executive of LUKoil, the country's largest private oil firm, said in late August.

The state's share in the energy sector has skyrocketed in recent years after Rosneft bought most of the assets of bankrupted oil firm Yukos and Gazprom entered Sakhalin-2 as a majority owner.

The growing state clout in the sector is also responsible for the stern warnings issued by firms to potential investors in internal company documents. A prospectus for TNK-BP's upcoming bond issue, obtained by The Moscow Times, notes that, "There can be no assurance that the increased presence of the Russian Government in the oil and gas sector will not have a material adverse effect on the Issuer or the Guarantor." A Rosneft bond prospectus issued this summer contained similar warnings.

The TNK-BP prospectus also warned that the company's ability to win new fields could soon fall, after a subsoil bill restricting foreign involvement in the energy sector becomes law. The bond prospectus, part of an $8 billion issue, does not disclose the amount being issued this time, but Interfax put the figure at $1.7 billion. TNK-BP sold its largest project, the Kovykta gas field in east Siberia, to Gazprom in May after months of pressure from state officials.