International
OECD slams Russian government strategy of increasing state control of economy as oil production growth slows dramatically
By Finfacts Team
Nov 28, 2006, 06:26

Before the start of the Russia-European Union summit in Finland last week: Russian President Vladimir Putin with President of the European Commission Jose Manuel Barroso (left) and Prime Minister of Finland Matti Vanhanen.

The Organisation for Economic Co-operation and Development on Monday criticised 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 focusing on market reforms, the government had been asserted 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.

The OECD highlighted Gazprom’s “seemingly insatiable appetite for asset acquisition, often at the expense of a focus on its core business”.

Rather than ramping up investment 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 the energy giant announced the purchase of Komsomolskaya Pravda, Russia’s largest circulation newspaper - its latest foray media venture. Gazprom also owns an airline, a bank, three television channels, several newspapers, radio stations, cinemas and hotels.

Gas production has stalled in recent years as Gazprom’s investment in developing gas fields has been very low. However, as it has a monopoly over transportation infrastructure, the group has prevented the development of independent gas producers.

The OECD report says Gazprom’s expansion is part of a wider trend of accumulating assets in state hands. According to one recent estimate, referred to 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 evident in the oil sector where the state share of the total production increased from 16 per cent in 2000 to almost 40 per cent. However, the growth of oil production has slowed down dramatically over this period.

The OECD says that the beginning of the trend was the seizure of Yukos’s assets in favour of Rosneft, the state-controlled oil company.

It says 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.