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Dec. 26, 2007
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State Corporations: Going for the Flow
The campaign for state corporations, which was begun in Russia before the election campaigns began, is the logical conclusion of the first stage of the construction of capitalism in Russia an all-at-once gift of $20 billion, with which authorities have realized the age-old dream of Russian business: never mind property, just give us a cash flow.
Never before in the history of Russian, and maybe human history, has there been such a generous gift to nonprofit organizations. Russian business of the first wave (we hope there will be more waves) always agreed with the principle that Boris Berezovsky is said to have given voice to in the romantic past of the early days of privatization. For creating a medium for business in Russia, property is less important than control over the cash flow, he said. The Russian business term sitting on the flow dates from that era.

Russian President Vladimir Putin most likely had more in mind than just giving a green light to business. The generation of entrepreneurs close to power since 2000 has had a complex about the previous generation, that from the era of privatization and loans-for shares auctions. The authorities know that they are realizing the dream of 1997 as they create the state corporations and create pure financial flow, cleansed of the crude matter of entrepreneurship. It should not be forgotten, however, that the founders of the state corporations have higher state interests in mind as well and those sitting on the flows can be removed and replaced. As with any property, there will be a nominal owner who decides who sits where.

It is unknown which of the businessmen in the circles close to the government first noticed that the 2004 edition of the law On Noncommercial Organizations describes state corporations. There is a simple history behind those passages. When the Deposit Insurance Agency was being founded to guarantee individual savers' bank deposits, the Central Bank and Finance Ministry thought long and hard about what legal status that agency should have. For a number of reasons, it could not be part of the Central Bank or a state agency. Thus the state corporation emerged. It is a special form of noncommercial partnership founded by the state to fulfill socially significant tasks. The activities of each corporation are described in a special federal law.

The new type of legal entity was not popular. Besides the Deposit Insurance Agency, the Agency for Home Mortgage Crediting was created. There was also a State Agency for Air Traffic Management, but only in name. In reality, it is a federal state unitary enterprise. The federal state unitary enterprise is the ideal form of entity to sit on the flow. It is independent in economic issues and obliged only to give its profits to the state. It has three shortcomings, however. First, its property belongs to the state. Second, the head of the enterprise is subordinate to a special state agency and can be unseated from the flow at any moment. Finally, federal state unitary enterprises are not very popular within the government. The primary strategy of the Ministry of Economic Development and Trade is to privatize the federal state unitary enterprises, not encourage them.

Sergey Chemezov was the first to bring the idea of creating a state corporation around the federal state unitary enterprise Rosvooruzhenie, which he headed, to the presidential administration. However, the subordinates of Larisa Brycheva, head of the presidential department of state law, blocked the idea of creating the Russian Technologies state corporation for quite a while. They had their reasons, too.

What is a state corporation from the perspective of economic law? Many people would probably be surprised to know that assets transferred to a state corporation are not state property from the legal point of view. Here's the catch. Under the law On Noncommercial Organizations, property transferred to as the investment in a partnership is the property of the partnership. The partnership itself is no one's property. It manages its assets as described in its charter. The rights of the founder are considerable in the partnership, but they are still not ownership rights. There is only one founder in a state corporation, and it is the Russian Federation. That is why the state corporation is independent. It is a set of assets that are managed for purposes established in its charter by managers appointed by the founder.

It is, perhaps, the best alternative to privatization for those who are sitting on the flow. The State Duma began passing laws to set up new state corporations in the autumn of this year. The founders of Rosnanotekh were the first to make it through the process. But they, people who are thought to be close to First Deputy Prime Minister Sergey Ivanov and Kurchatov Institute head Mikhail Kovalchuk, did not have an easy time of it. Former prime minister Mikhail Fradkov opposed the idea of the state corporation. Some say that was why his government was dismissed.

State corporations, as a rule, are subordinate not to the government, but to the Russian president, and act to accomplish some important goal. Six such foals have already been chosen. They are the development of nanotechnology (Rosnanotekh), development of hi-tech exports (Rostekhnologia), construction of the infrastructure of the 2014 Olympics in Sochi (Olimpstroi, headed by Semen Vainshtok, who was squeezed out of Transneft by opponents associated with the enforcement agencies), financial reform of housing utilities (The Fund for the Support of Reform of Housing Utilities, headed by little-know former Federation Council member Konstantin Tsitsin), development of atomic energy (Rosatom, headed by Sergey Kirienko) and abstract financing of infrastructural and strategic projects of state importance (the Development Bank VEB, the reformed Vneshekonombank USSR, headed by Vladimir Dmitriev).

But even Putin, having found the ideal way to set managers close to him on the flow and even give their activities social significance, was unable to overcome the main shortcoming: the leadership of state corporation is controlled by him and those close to him in the government and presidential administration only as long as he remains president.

Rosnanotekh began receiving 130 billion rubles and the Development Bank VEB 100 billion rubles at the end of last month. The Fund for the Support of Reform of Housing Utilities will soon receive 250 billion rubles as its equity capital. Thus the contribution of the state to noncommercial partnerships has been 480 billion rubles (about $20 billion). The value of the assets that the state is alienating from itself cannot be estimated accurately. In Rosatom alone, it is trillions of rubles, and an entire sector of the economy. There is no doubt that state corporations will have over $150 billion in assets, counting property, next year.

The state corporations can manage those assets as demanded by the sketchily described goals and tasks of the charters and as allowed by the supervisory council, on which there is no one the president does not trust. Rosnanotekh has already stated that that it has not nanotechnology projects yet and it will put its 130 billion rubles in banks. The profit received from the deposits will be used for nanotechnology goals and a number of problems on the banking market will be solved for the Central Bank and Finance Ministry at the same time. Rostekhnologia states openly that it will hold an IPO within a few years of most of the assets of the companies transferred to it. The profit will, of course, go to support high technology and military technology. There is no risk of privatization. A state corporation cannot even be bankrupted. It can only be liquidated through a complex procedure.

It is no surprise then that Putin announced at the end of last month, with a certain measure of harshness, that no new state corporations are needed. Rumor has it that the presidential executive staff has come up with proposals for a few dozen more state corporations, from the post office (Andrey Kazmin, who was moved from the helm of Sberbank to that of the Russian Post Office to make room for former Economics Minister German Gref, perceived the advantages of state corporations fast) to Social Investments, which was described to Kommersant by Finansgroup head and co-owner Oleg Shvartsman. The purpose for the establishment of that state corporation was supposed to have been the social protection of former special services workers, through velvet privatizations, among other means.

It is the gift that keeps on giving. The state corporations, which are likely to become for those close to Putin what loans-for-shares auctions were for the Yeltsin crowd, can receive federal budget funds, if the funds they have already been given are insufficient. The generosity of the giving is unbelievable - $20 billion in a quarter in money alone for worthy causes (investment in noncommercial partnerships that create social good is a typical form of philanthropy) must be a record.

We can only guess what will come of this in three or four years. It is all experimental. No one has founded state corporations on such a scale i such a form before anywhere ever.
Dmitry Butrin

All the Article in Russian as of Dec. 24, 2007

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