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2009-02-02 - 00:54:00 - WSJ(2/2) Threat To Russian Privatization Seen

WSJ(2/2) Threat To Russian Privatization Seen

   By Marc Champion

DAVOS, Switzerland -- Russia risks reversing the process of privatization in its response to the current downturn, even if the government doesn't intend it, according to Anatoly Chubais, the man who sold off state industries to so-called oligarchs in the 1990s.

When Russian Prime Minister Vladimir Putin said in a speech Wednesday that his government had no interest in running more of the economy, many inthe audience were skeptical.

"Good luck with that," quipped former U.S. President Bill Clinton, speaking at a later session of the World Economic Forum here.

The Kremlin's control over the economy, particularly the energy sector, has grown dramatically in recent years, despite officials' insistence there is no policy behind it.

Still, according to Mr. Chubais, Mr. Putin probably meant what he said. The latest bout of state intervention in Russia was no more planned in Moscow than in Washington or Europe, he says. The problem, he says, is that the result may be the same, even if it wasn't intended.

"We have a very bad tradition in Russia, where strategy comes from tactics. So what I am afraid of is that this tactic [of taking government stakes in companies] will become a strategy, which is a real risk," said Mr. Chubais, who was in Davos when Mr. Putin made his speech.

Mr. Chubais is an unusual figure in Russia who still flies the privatization flag. Last year, as the state was swallowing up once-private oil companies, he made himself redundant by breaking up RAO UES, the state electricity monopoly he ran, selling the pieces to private buyers. He is now chief executive of Rusnano, a $5 billion government fund to develop a Russian nanotechnology industry.

The severity of the downturn in Russia has shown just how dependent the country remains on commodities, which account for more than 80% of exports, Mr. Chubais said. Russian towns still depend on single industries for their survival, making them hugely vulnerable should they shut down. Small and medium-size businesses account for less than 20% of the economy, compared with well over 50% in most industrialized nations.

By the time the downturn is over, says Mr. Chubais, some of the companies the government is now bailing out may not exist. He gives the country a 50/50 chance of escaping without political turmoil.

Other Russian businessmen in Davos this week were equally concerned about the outlook. "In emerging markets, people are finding out that the new system isn't perfect. The risk of going back, not to communism but to something very worrying, is quite dangerous," says Ruben Vardanian, chief executive of Moscow-based investment bank Troika Dialog.

Mr. Chubais said Russia has ignored a resource that could help broaden the economy and provide high-value jobs outside the commodities sector -- its scientists. His fund, Rusnano, was started in 2007 and now has around 800 applications for projects. It plans to invest on average $1 billion a year.

A lot of projects will be for the aerospace, nuclear and resource industries, where Russia has ready buyers, as well as medicine, electronics and other areas, Rusnano says.

Among projects approved so far are one to make catalysts for oil refineries; one to coat oil drilling bits, so they become harder and need less sharpening; and another to coat the blades of gas turbines, making them stronger and more efficient. Once the projects are up and running, Rusnano plans to pull out of the companies involved, according to the company.

Russian officials up to Mr. Putin and President Dmitry Medvedev have long said they recognize the need to broaden Russia's economy and to encourage the growth of small companies that would create jobs fast and make the economy more resilient. But so far it hasn't happened.

"Russians did not use all the economic benefits of the growth era. It's still very much a petro-state," says Angela Stent, head of the Russia and Eurasia department at Georgetown University in Washington. Smaller companies of the kind Mr. Chubais wants to see experience legal hurdles and costs such as bribes that can make it hard for them to survive, she says.

Mr. Chubais said it isn't the ideal environment for high-tech startups, but he's undaunted. In 1995, he implemented the controversial "loans for shares" scheme, in which the state borrowed money from private oligarchs with oil fields, metals producers and other state assets as collateral. When the state didn't repay the loans, the oligarchs became owners of huge resource assets at discount prices.

The move was hugely unpopular, but Mr. Chubais defended it at the time as necessary to break state control over the economy.

So long as state ownership doesn't now develop into a long-term government strategy, says Mr. Chubais, in three or four years "we'll have a second wave of privatization that will be aimed to getting revenues, unlike the privatization of '90s which was aimed at fighting Communism."

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(END) Dow Jones Newswires

February 01, 2009 19:54 ET (00:54 GMT)

Copyright (c) 2009 Dow Jones & Company, Inc.

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