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. Last Updated: 07/27/2016

Falling Public Interest in Public Sector Expansion

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Last week, LUKoil head Vagit Alekperov expressed his concerns over the growing strength of state companies. With the purchase of former Yukos assets, Rosneft has become the country's largest oil producer, and Gazprom's aspirations mean the space for private sector participants continues to shrink.

The state's share in the economy has grown in absolute terms but has stabilized as a percentage, according to the State Statistics Service. In 2000, 43 percent of all assets in the country were in state hands (7.1 trillion rubles, or $277 billion), while the figure for 2005 was 40 percent (13.9 trillion rubles). But these figures don't show the real picture -- the methods for calculating public sector size have even been criticized by Finance Minister Alexei Kudrin, who says they underestimate the level of state ownership.

In 2005, the state became the largest player on the mergers and acquisitions market, as Gazprom's purchase of Sibneft alone carried a price tag of $13.5 billion, and the state's share in mergers and acquisitions was 30 percent, according to Mergers.ru. The figure will be significantly higher this year. Rosneft has spent $26 billion on former Yukos assets, and Gazprom bought stakes in the Sakhalin-2 and Kovytka fields, as well as in electricity utility Mosenergo. State-controlled companies have spent a total of $31.5 billion on Yukos assets, while the value of private sector merger and acquisition deals has been $35.6 billion, according to KPMG.

As companies are buying and new corporations of this type are being formed, the privatization of state holdings is being curtailed. In 2005, privatization revenues were 34 billion rubles (about $1.3 billion), or less than 80 percent of what was planned. The figure for 2006 was 18.6 billion rubles, less than half what was planned.

Unified Energy System's plan to privatize its generation assets should be lowering the state's stake in the electricity sector, but Gazprom's purchases of stakes in the privatized entities are undermining the effort. The state's ownership of generating capacity, given the current trend, will actually grow from 44 percent to 56 percent as a result of the reforms, according to forecasts by the Institute for Energy Policy.

The public accepts state capitalism as a cure for its disenchantment with the privatizations of the 1990s. But the degree to which the state is moving back into the economy is reducing the effect: According to an August poll by the Levada Center, the number of people favoring the return of privatized property to the state has fallen to 37 percent from 43 percent over the past two years.

This appeared as an editorial in Vedomosti.