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Wednesday, November 29, 2006

Russia is Strangling its Economy

The Australian News reports that "Russia is strangling its economy" according to yet another international study that has condemned Russia:

RUSSIA'S bureaucracy is corrupt, its health system is in crisis and the expansion of the state into the private sector bodes ill for the country's future, according to the Organisation for Economic Co-operation and Development.

In an analysis of Russia's prospects, the OECD survey provides a damning critique of the country's efforts at reform and gives a stark warning of the state's aggressive intervention in strategic industries, notably the expansion of gas monopoly Gazprom.

Structural reform of the Russian economy is slowing, the OECD says, with modest achievements over the past two years.

But government intervention is accelerating in sectors regarded as strategic, such as oil, aviation, power generation, cars and finance.

"Increasingly, policy seems to have been focused not on market reforms but on tightening the state's grip on the commanding heights of the economy. This bodes ill for Russia's growth prospects," the OECD says.

Of particular concern is Gazprom's "seemingly insatiable appetite for asset acquisitions, often at the expense of a focus on its core business".

The report points to a sharp expansion in state ownership of stock-market-quoted enterprises, from 20 per cent in mid-2003 to 30 per cent this year.

At the same time, there has been a doubling in state ownership of oil production to 33 per cent, a period that included the bankruptcy of the Yukos conglomerate and its partial takeover by the state oil company, Rosneft.

The OECD argues this a step back, saying the state's track record as an owner is poor.

And the absence of significant reform of the gas industry constrains the growth of rival gas producers at a time when concern is mounting about the sustainability of Russian gas supplies.

"The expansion of state ownership in important sectors will probably contribute to more rent-seeking, less efficiency and lower growth," the report concludes.

The OECD's warning comes after mounting concern that Gazprom is being distracted from its core gas business by investments in the oil and electricity sectors, as well as by political ventures into the media.

This month, the International Energy Agency called on Gazprom to bring more supplies on stream. Viktor Vekselberg, a Russian oil tycoon and partner of BP, estimated last week that Gazprom's output would fall five billion cubic metres short of demand next year.

Russia faces a loss of competitiveness from rapid exchange-rate appreciation and the inflationary pressure of petro-dollar surpluses.

Russia's health and welfare picture is grim, the OECD says, with life expectancy now just 65 years - five years lower than its late-Soviet peak.

Endemic corruption is a deterrent to investors, in particular small and medium-sized enterprises. The OECD survey condemns Russia's state bureaucracy as "inefficient, largely unresponsive to either the public or its political masters, and often corrupt".

The report urges the Government to implement its new administrative reforms, and calls for wider changes, including the strengthening of the rule of law, civil society institutions and an independent press.

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