How to bolster Russia’s energy sector

Drawing by Alexey Iorsh

Drawing by Alexey Iorsh

A combination of public and private ownership is the only way to encourage both initiative and expansion in the energy sector.

Nationalization trends in the Russian oil business became conspicuous soon after the 1998 financial crisis. In the early 2000s, analysts were shocked to discover that state-controlled oil companies were expanding their reserves and output, while privately owned companies were experiencing reductions. This trend made it clear that the widespread belief that private ownership of businesses is more efficient than state ownership is true only for small and medium-sized enterprises. In the case of big corporations, privately run businesses tend to spend unwisely and behave inappropriately as frequently as state companies do.

In 1997, Russian reformers contracted a team of specialists to study the comparative effectiveness of state-run and private companies. Their report showed that privately owned businesses were only slightly more effective than state-run companies in Russia. Importantly, the team compared private companies operating in the most profitable sectors (most of which had been privatized by that time) and state-owned enterprises in marginally profitable sectors. Given this comparison base, the original conclusion that private business is slightly more effective than state business meant that private ownership was actually much less effective than state ownership.

Apart from the ideological bias, the idea of private business being more effective than that controlled by the state is driven by the political interests of officials. A strike at a state-run business indicates a political crisis, while a strike at a private company is beneficial to the state, which can enhance its influence by acting as mediator.

When liberal academic Jeffrey Sachs studied the reasons behind the global success of China, with its nationalized economy, even he concluded that the key to success is the institutional framework rather than the form of ownership.

The best ownership pattern is determined by technology and the general concept of harmonization of the interests of business and households. Outside national borders, a must further the interests of national businesses as the most creative and aggressive element in society by supporting and partially guiding their expansion.

Within the country, however, where there is no place for even commercial aggression, the state must uphold the interests of the population. This is not so much because of its dominating political influence as because an unstable, split society cannot be competitive in the global marketplace.

One example of a combination of commitment to the interests of business in external policy and to the interests of the population in internal policy is the attitude of various states to ownership patterns in the oil sector.

When producing crude in their own country, operating companies are, as a rule, controlled by the state in order to meet the interests of the local population – this is true not only in developing economies, but also in developed countries, such as Norway.

When crude is produced abroad, however, private ownership is preferable for ensuring more effective expansion. The practical aspect is crucial: A country that has deposits under development finds it easier to allow private companies into projects than state-controlled foreign corporations because the threat to political sovereignty is more obvious.

This model has considerable costs for business; yet they will pay off in the effectiveness of the state, which sees to it that the internal “rules of the game” are observed and promotes the foreign expansion of business. This will certainly benefit the state more than it will lose by imposing internal limitations. Big business can agree to some self-limitations domestically, such as compliance with antitrust regulations, otherwise, no regulation by the state, even the most effective one, will be possible.

Mikhail Delyagin holds a doctorate in economics and is the director of the Institute for Globalization Studies

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