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. Last Updated: 07/27/2016

Enduring Corporate Structures

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The State Duma has passed a bill on first reading establishing a corporation devoted to nanotechnology. This state-owned entity will carry out commercial activities tax-free, and receive 180 billion rubles ($6.9 billion) in funding for research and development in this high-tech field.

Strangely, whole sections of the bill refer to a charter of the Russian Academy of Sciences that was never approved by scientists at the academy. The charter was adopted so that Mikhail Kovalchuk could be installed as commercial director of the institution. Kovalchuk currently heads the Kurchatov Institute, Russia's leading nuclear research facility. A few years ago, former presidential candidate Ivan Rybkin referred to Kovalchuk's family as "Putin's purse."

This is just one of the state-run corporations intended to promote Russia's development. First Deputy Prime Minister Sergei Ivanov's speech at last week's St. Petersburg International Economic Forum made it clear for ministers that in Russia's "sovereign democracy" the key is to promote similar pet projects of their own.

Now ministers are storming the Kremlin with proposals. The Finance Ministry has already presented a project for the "long-term social and economic development" of the country. Similarly the aviation industry is predicting that by 2020 it will realize a "breakthrough civil aircraft construction project in cooperation with leading foreign firms, while retaining Russia's role as system integrator."

Until now, economic analysis and science fiction were considered separate fields, but the Economic Development and Trade Ministry has managed to achieve a synthesis.

Now consider the facts. The Soviet-era research and development establishment was unable to keep up with scientific advances in the United States. Further, the Soviet Union collapsed due at least in part to former U.S. President Ronald Reagan's embargo on the sale of certain advanced technologies.

One advantage of the Soviet research system was that although huge sums were often spent to no purpose, it was impossible to actually steal anything. With state-owned corporations operating in a free market economy, it is a different story. It is like setting up bottomless money pits with direct lines to private accounts in Geneva banks.

An economy based on corporations like these ends up a hybrid between socialism and capitalism. Taxpayers provide the capital, but the profits go to individuals. The best example of such an economic system was that under Turkmen autocrat Saparmurat Niyazov, the self-styled Turkmenbashi, or "Father of All Turkmen." His state-owned collective farms handed over their entire cotton harvests to the government at no cost, but the firms that reaped the profits selling the cotton were private. When asked why he held government funds in private overseas accounts, Turkmenbashi answered: "to prevent government officials from stealing them."

The Russian economy, which until recently was dominated by big business, is now controlled by individuals in President Vladimir Putin's inner circle whom he has placed at the head of state corporations. This is a drawback from an economic standpoint: A business owner is interested in developing the strategic potential of the enterprise, while an appointed chief's main motivation is to remain plugged into the income stream. This makes it easier to control the company. If the company is privately owned, removing someone from the top requires legal action, while someone appointed to run things can simply be fired.

Corporations with charter capital provided by an autocrat's decree and designed to channel profits to those close to the sovereign were not unusual in feudal economies, but they are rarely found in the market variety. Trying to succeed in modern fields like nanotechnology and civil aviation construction via these archaic throwbacks should prove an interesting experiment.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.