Putin Turns up the Heat on State-Owned Companies

But what is really needed is legislative reform to create a better business environemnt, fortunately there are signs of progress

Mon, Dec 15, 2014
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Laid down new rules

This article originally appeared at Business New Europe


There is an obvious solution to help deal with Russia's economic slowdown that is being exacerbated by the tumbling oil prices: do those reforms that should have been done ten years ago. It’s kind of obvious. But also just as obvious is that a country that doesn’t have to do reforms, probably won't do them.

To be fair to Russian President Vladimir Putin, he already launched his drive to lift Russia from 120th place in the annual World Bank’s “Doing Business” ranking to 20th by 2018 back in 2012, when things didn’t seem all that bad. And there have been some successes; Russia rose to 62nd place in the latest ranking, so is on course to achieve his goal.

But clearly getting your tax administration code to tick the World Bank boxes is nowhere near enough to lift a stagnating economy and make a real difference to production and manufacturing.

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For that to happen you need a wholesale transformation of the way the country is run and boost confidence in domestic business that it's worth investing into – currently completely lacking in Russia if the negative fixed investment figures are anything to go by.

So as the year comes to an end and everyone in Russia starts planning for the next one, there has been a flurry of activity and new initiatives to put some steel into the political will to carry out those badly needed reforms.

“We have a strategic task of entering the top 20 [of the World Bank's ranking], but not for the sake of the figure, but just to allow normal work and normal business climate in the country, this is the key goal,” Prime Minister Dmitry Medvedev said at a pep talk for leading Russian businessmen on December 11.

Two days earlier, Putin called in the captains of Russian industry and instead of buttering them up, dressed them down, laying down how things should be run in 2015 and the changes they were going to have to make.

This meeting looks similar to the now famous "oligarch meeting" in 2001, when after his election as president Putin explained to the Yeltsin-era businessmen how things were going to change now that he was boss.

According to the Kremlin website, this meeting on December 9 was attended by all the modern ZAO Kremlin oligarchs: Alexei Miller, CEO of Gazprom; Igor Sechin, president of Rosneft; Nikolai Tokarev, president of Transneft; Vladimir Yakunin, president of Russian Railways; Mikhail Pogosyan, president of United Aircraft Corporation, Alexei Rakhmanov, President at United Shipbuilding Corporation; Sergey Chemezov, general director of Rostec Corporation; Sergey Frank, general director of Sovcomflot, Igor Komarov, general director of Rocket and Space Corporation; and Vitaly Saveliev, general director of Aeroflot.

Putin laid out the new rules of the game. Firstly, state-owned companies (SOEs) need to be more efficient. "The matter concerns efficiency improvement in the first place," Putin told the meeting, adding he was expecting all the bloated state-owned dinosaurs to cut operating costs by at least 2-3% every year, unwind balance sheets and draw up a clear plan for the sale of non-core assets.

Secondly, SOEs have to bring some order and transparency to their cash flows. Putin told them to consolidate all the accounts of their various subsidiaries into a single accounts that can be checked by the government and all payments need to be centralised.

The Russian government has already decided to beef up the national treasury system to better understand its own cash flows, which will open in July 2015, Putin said.

Also the "authorised" bank system is back – a system used in the 1990s where all state funds go through a handful of hand-picked "backbone" banks who in effect run the national treasury system. Centralising tax payments at the federal level was one of the very first things Putin did on taking office, which was extremely effective at stamping out some of the more egregious stealing going on at the regional administrative level.

Thirdly, SOEs are to target import substitution in their investment plans. Only equipment identified as "unique" may be purchased abroad, Putin said.

Fourthly, SOEs must hike dividend payments to a minimum of 25% of profits as calculated under Russian accounting standards. Currently, only half of Russia's SOEs comply with this order, with the rest having organised some sort of exemption – and that will end in 2015, Putin promised.

More ominously, in the closed part of the meeting Putin reportedly threatened to hold managers personally responsible for poor financial performance, according to reports.

All this is well and good, and Putin is right that the government could earn a lot more tax revenues if the state-owned companies were run more efficiently (and their bosses stole a little less). But the whole discussion misses the point, that badly run state-owned companies are not the problem, it is the lack of a stable and secure operating environment for the private sector that is needed if Russia is really going to meet its potential.

A step in this direction was made on December 9 when Putin ordered amendments to the tax and criminal code designed to improve the business environment, which were based on the recommendations of Boris Titov, Russia's business ombudsman and anti-corruption tsar.

The phlegmatic Titov was holding out to draw up the changes to the criminal code that would lighten punishments on small business and reduce the power of investigators to prevent them abusing their power.

He wanted to coordinate the work on the draft amendments to the criminal law with the Ministry for Economic Development and the Ministry of Finance, but Putin insisted on including the Ministry of Internal Affairs and the Federal Security Service as well, which Titov fears will distract from the goal of creating a more conducive business environment.

The new laws will be put to the Duma to consider in the first months of next year.

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