OECD rebukes Kremlin over economy

The Organisation for Economic Co-operation and Development on Monday slammed the Russian government for its expansion into key economic sectors and raised concern about the “seemingly insatiable appetite” of Gazprom, its state-run energy giant.

In a critical report on the Russian economy, the OECD also said that the Kremlin’s expansion into key economic areas was a “disturbing trend” that “bodes ill” for the country’s growth.

Instead of concentrating on market reforms, the government had been increasingly focused on tightening the state’s grip on what it deemed to be strategic sectors, which include aviation, media and finance, as well as energy.

“The expansion of state ownership in important sectors will probably contribute to more rent-seeking, less efficiency and slower growth,” the OECD said.

It was particularly concerned by Gazprom’s “seemingly insatiable appetite for asset acquisition, often at the expense of a focus on its core business”. The report follows a chorus of international and domestic criticism of Gazprom’s business strategy.

Instead of investing in gas production, Gazprom has been expanding its interests in recent years in other sectors such as oil, electricity, power generation machinery and media. Last week’s announcement of the purchase of Komsomolskaya Pravda – Russia’s largest circulation newspaper – is its latest foray into media. It also owns an airline, a bank, three television channels, several newspapers, radio stations, cinemas and hotels.

Gazprom’s investment in developing gas fields has been minimal over the past few years, leading to stagnating production. Yet its monopoly over transportation infrastructure has constrained the development of independent gas producers.

The OECD’s criticism comes at a time of growing concern about Russia’s ability to sustain and increase its gas production.

But the report says Gazprom’s expansion is part of a wider trend of accumulating assets in state hands. According to one recent estimate, cited by the OECD, the state-owned share of Russia ‘s equity market capitalisation rose from 20 per cent in mid-2003 to 30 per cent early this year.

The change has been particularly visible in the oil sector where the state share of the total production increased from 16 per cent in 2000 to almost 40 per cent. Yet the growth of oil production has slowed down dramatically over this period.

The OECD traces the beginning of the trend to the expropriation of Yukos’s assets in favour of Rosneft, the state-controlled oil company.

It argues that the Yukos affair exemplified the trend towards state ownership.

However, the Russian state has also been extending its reach to non-energy sectors of the economy, including aviation and automotive.

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