What Is the State’s Share in Russia’s Economy?
Earlier this year, sanctioned tycoon Oleg Deripaska told the Financial Times that the Russian state holds 70 percent of the country’s economy in its hands; this figure has been bandied about since at least May 2014, when an International Monetary Fund paper made the claim. Russia’s Federal Anti-Monopoly Service gave a similar estimate for 2017-2018, although without citing specific sources and using indefinitive language. At the same time, respected international organizations and researchers have offered plenty of competing assessments, mostly in a range from 25 to 55 percent (see table below), and several experts queried by Russia Matters agree that the most realistic numbers they’ve seen in the past two years fall between 33 and 46 percent. Despite this smaller share, the experts have seen a trend of strategic nationalization under Russian President Vladimir Putin and they doubt the coming years will bring greater efficiency or competition to Russia’s economy.
For U.S. policymakers or others wanting to understand Russia—whether as an adversary or a maker of common cause—these facts matter, since a state’s overall heft and specific stakes in the national economy impact both its policies and its national power.
One reason for the discrepancy in estimates, naturally, is the use of different methodologies with different strengths and weaknesses. Statistics in the databases of the IMF, World Bank and Organization for Economic Cooperation and Security, for example, do not take into account state-run companies; they show general government expenditure and revenue as a percentage of GDP, including federal, regional and local governments plus so-called extrabudgetary spending—which covers both social spending, like pensions and social security, and certain types of research, development and investment. The 2014 IMF paper that estimated the state’s share of the economy at 68-71 percent—at a time when the three databases cited above were estimating 32-41 percent—also reflects general government expenditure and revenue, but then adds the expenditure and revenue of 26 large state-run corporations to the count. That, however, seems to entail some double counting, according to Sergei Guriev, chief economist of the European Bank for Reconstruction and Development (EBRD), who writes: “Some of the government’s spending (funded by government revenue) is the revenue of the state-owned enterprises.”
Clearly, expenditure and revenue aren’t the only variables worth measuring. We asked several economists and other economically oriented social scientists to weigh in on three questions: (1) Which approach to assessing the share of the state in Russia’s economy strikes them as the most sensible? (2) How would they describe and/or explain the changes in that share over the past 20 years? And (3) what trends do they anticipate in the coming years? Highlights from their answers follow.
Best Way to Measure: Estimating Value of Assets or Value Added
The EBRD’s Guriev tells us that the ideal approach to measuring the state’s share in a country’s economy “would involve collecting data on ownership of all companies and estimating the market value of these companies’ assets,” but this is unrealistic; instead, “researchers limit themselves to a certain subsample of companies and replace the market value of assets (which is hard to estimate) with more easily observable variables such as sales, employment or value added.” One fine recent example of this approach, Guriev believes, can be found in a January 2018 report on efficiency by the Moscow-based Center for Strategic Research, or CSR, which estimated the state’s share in Russia’s GDP at 46 percent as of 2016. The calculations were based on a cumulative assessment of three components, using value added in all three cases: companies with state ownership stakes, the general government sector and so-called state unitary enterprises, or GUPs.
Two American scholars—historian Chris Miller of Tufts University’s Fletcher School, the author of two books on Russia’s economy, and political scientist David Szakonyi of George Washington University, a research fellow at the Higher School of Economics in Moscow—both spoke highly of a 2019 IMF working paper that estimated the state’s share in Russia’s economy in 2016 as 33 percent; the EBRD’s Guriev also thought highly of it. Here, once again, the authors were measuring the state’s share—comprising both general government and state-owned enterprises, or SOEs—in Russia’s total value added. At the same time, the authors note that the state represents 40 percent of formal-sector activity and 50 percent of formal-sector employment. Miller praised the paper as “very strong,” while Szakonyi called it “a vital correction to possibly years of overestimating the state’s share based on flawed data.” (The paper’s authors argue explicitly against the 70-percent estimate, hypothesizing that it was based on a comparison of apples and oranges: 2005 EBRD data on “the state’s share in value added” versus 2012 data on “state gross revenues expressed as a ratio of GDP.”)
Changes Over Time: Strategic Nationalization
Both producers and consumers of these measurements have noted that the state’s footprint in Russia’s economy has grown in the past 20 years, but with caveats: The state’s share in GDP seems to have flatlined over the past decade; meanwhile, government control is now highly concentrated in energy, banking and a handful of other, often “strategic” sectors—perhaps not surprising considering the topic of Putin’s somewhat controversial dissertation on strategic planning and state control of resources. The CSR report—which includes data-rich appendices on the sector-by-sector concentration of state economic control—says that in 2000-2008 Russia clearly saw the state sector’s “quantitative and/or qualitative expansion” by comparison to the 1990s (a time of post-Soviet privatization programs). But in the 2010s “the trend changed: The share in key economic indices of companies with state ownership either stabilized or grew insignificantly.” The 2019 IMF paper also says that “the Russian state’s share in output increased marginally in the last few years, from 32 percent in 2012 to 33 percent in 2016,” adding that “the state has a stronger presence” in “the top 15 most concentrated economic activities” than in the 15 least concentrated.
Many of the experts we read and queried for this article pointed to a trend toward strategic nationalization, which often, in turn, hurts efficiency and competition. Miller of Tufts highlighted the Russian government’s “bigger role in the energy sector” as a key trend over the past 20 years, while the EBRD’s Guriev noted that “the state significantly expanded its control in certain strategic sectors such as banking, transportation, energy, technology” and “we have seen major nationalizations … (Sibneft, TNK-BP, Yukos, Avtovaz, United Machinery),” as well as the “government’s injection of capital into the capital of state-owned banks, state-owned enterprises and state corporations.” These corporations were a new type of legal entity created in 2007-2008, according to CSR, some of which dominated whole sectors like aviation, nuclear power and ship building. The presence of SOEs “is large in strategic sectors (energy, defense) and natural monopolies (electricity, gas, water and railway transportation), but also in the financial sector,” according to the 2019 IMF paper. A 2015 policy brief published by the Peterson Institute for International Economics likewise argued that the state’s share in the economy, and particularly in sectors seen as strategic, had grown under Putin, with the 2003 arrest of then Yukos CEO Mikhail Khodorkovsky as the watershed: “After nationalizing Yukos, the Russian government started taking control of privatized companies in ‘strategic’ sectors such as oil, aviation, construction, power-generation equipment, machinery and finance.” The nationalization of the banking system came a bit later, at least in part growing out of the 2008-2009 global financial crisis as both Guriev and CSR point out. According to the Peterson brief, “while in 2005 the share of private commercial banks in total assets was nearly 70 percent, by 2015 it had shrunk to half that.”
This said, it’s worth noting once more that in recent years the state’s share in GDP seems to have remained relatively stable. Two of the reasons, as Szakonyi put it, are “restrained budget spending as of late” and “the persistence of the informal economy, in which the government plays little role.”
Short-Term Predictions: More State, Less Efficiency and Competition
“The important question is not really the size of the state,” Miller wrote us, but whether the state is “doing a good job managing the parts of the economy that it controls or influences. Looking at most state-owned firms in Russia, the answer is no.” The authors of the 2019 IMF paper and the 2018 CSR report agree, with the latter suggesting that the size of the state’s share in a company is inversely proportional to the company’s efficiency. The IMF authors, meanwhile, write that “SOEs appear to underperform relative to non-state firms in a variety of economic activities” and that the state’s footprint in the economy takes the form of lower efficiency in resource use and reduced market competition, with the lack of competition exacerbated by state-controlled procurement practices. Miller was not optimistic that this would change in the foreseeable future, noting that “the key beneficiaries from the inefficiency and corruption of Russia’s state sector are the political elite”; until there is pressure on them, “either due to demands from below or due to competition from rival groups, the elite has no reason not to keep skimming money from the state.” Guriev, in turn, pointed out that Putin’s 2018 May decree on so-called national projects makes no mention of privatization, unlike its 2012 predecessor, which called for the government to pull out of the capital of SOEs by 2016 “except for natural monopolies, natural resources and the defense sector.” As a result, “given the continuing capital flight … and dramatic decline of FDI [foreign direct investment], we can expect that exiting private owners will sell their assets to the state or state-owned firms.”
Nini Arshakuni is a former graduate student associate at Russia Matters and at Harvard's Davis Center for Russian and Eurasian Studies.
Natasha Yefimova-Trilling is editor of Russia Matters.
The opinions expressed in this commentary are solely those of the authors.