Public Sector in Russia: an Enabler of Economic Growth or a Ticking Time Bomb

Gartskia Mikhail

Abstract. According to the conventional view State as an economic entity is chronically inefficient. The major part of mainstream economists and management experts consider such statement to be axiomatic. Unlike managers of private companies public servants appear to have no unambiguous goals, to be unmotivated to create added value and to be inclined to use the powers for personal gain. However recent studies conducted by experts show that under certain conditions, state-owned companies can consistently show strong financial results.

Keywords: Public sector, market economy, oil industry, investment, Gazprom, FAS, GDP


As it follows from the latest FAS (Federal Antimonopoly Service of the Russian Federation) report on the state of competition the government is rapidly increasing its presence in Russian economy. The contribution of government services to the GDP has increased from only 35 per cent in 2005 to 70 per cent in 2015. State-owned companies now control about half of the banking and insurance sector, 40-45 per cent of the oil and gas industry, 73 per cent of the transport industry. Thus modern Russia is «in-between state» in comparison to market economies of developed countries where there is a minimized government involvement in the business. And China where state-owned companies are the backbone of the financial system. While the country’s authorities have not made official statements it is logical to assume that the development of state-owned companies and enhancing the effectiveness of such companies as seen as a potential «engine» for the economic growth.
An eminent economist Aleksey Kudrin who served as Finance Minister for 11 consecutive years is less sanguine about it. He admits that public companies inefficiency has become one of the most enormous challenges for the country. They seem to be not only inefficient, but also inflexible since they don’t meet the market conditions and are built on the administrative resources, replacing thus private companies and force such companies out of the market.
In order to analyse all pros and cons of increasing public sector in Russia it is of scientific interest to examine investors attitude towards state-owned companies and to review the situation in the oil and gas industry which represents a cornerstone of country’s economy.

The investment attractiveness of public sector companies

It is well known that in the long term, investment is important for improving productivity and increasing the competitiveness of an economy. Without investment, an economy could enjoy high levels of consumption, but this creates an unbalanced economy. Every country thus has a strong interest in attracting investment. That is why the question is whether state-controlled companies are more appealing for the investors than private companies.
Some experts believe that State control is the worst form of company ownership. In September 2016 the Financial Times ran a piece on Copley Fund Research analysis of the world’s stock market. State-controlled companies were found to account for just 4 per cent of the market capitalisation of developed markets but 35 per cent of that of emerging markets and 43 per cent of frontier markets.
They are particularly prevalent in the Gulf states of Qatar and the United Arab Emirates, accounting for more than 80 per cent of market capitalisation in each, and in Russia, Malaysia and China. Norway, where government-controlled Statoil and Telenor are the two largest companies, is the sole developed world country in the top 10 of countries with highest concentration of state-controlled companies.
Unfortunately for minority investors, these state-controlled companies typically generate a lower return on equity than other listed companies: 8.1 per cent versus a market average of 9.7 per cent in developed markets, 9.6 per cent versus 11.2 per cent in emerging markets and 11.2 per cent versus 13 per cent in frontier countries.
One cannot deny the results of the mentioned research. But the basic concept of risk management theory stipulates that there should be a balance between the level of risks and the rate of return. And in Russia any private company no matter how stable it is and no matter how efficiently it is managed may have the same fate as notorious «Yukos» and «Transaero». It means that every private company runs a risk to suddenly leave the market owing to circumstances beyond the business. In this regard state-owned companies provide guarantees that are much-needed for the investors. So as far as emerging and frontier markets are concerned there are factors (i.e. security guarantees) which are as important as cost recovery.

The efficiency of private oil companies and state-controlled oil companies

The latest researches in the field of oil and gas industry has shown that at the beginning of a new century which is characterised as an era of higher oil world prices the situation on the market has changed greatly. While private oil companies sector suffered from negative trends in the utilisation of resources state-owned companies strengthened their position in the world market and increased effectiveness.
Amy Myers Jaffe (University of California leading energy consultant and expert on global energy policy) notes that since October 2002 the stock value of multinational oil companies has doubled, while the stock value of national oil and gas companies, including the shares of «Gazprom», «Petrobras», «Petrochina», has increased by over 500 per cent.
If we focus on the progress of national oil companies in Russia and China the fact is that both countries are criticized for having «bloated public sectors». But actually strengthened control, principles of corporate governance and transparency introduced by authorities allowed government-controlled oil companies to reach and in some cases to outrun private companies. State presence thus can have not only negative but in some cases (e.g. oil industry) positive effect.


Both public and private sector have a significant role in national economy. For general businesses without externalities, the private sector are likely to be more efficient and better at job creation. Reducing scope of government spending thus could create more private sector opportunities for investment and job creation.
However, the private sector also need a good public sector to provide, education, health care and infrastructure investments. Also, the private sector need a stable macro-economy which the government may be able to provide.
There are many quite effective government corporations, for example Gazprom and Transneft in Russia; Petrochina in China. So there should be no general opinion regarding the increasing of government presence in the economy. Each case should be treated with individual approach.


Mahmoud A. El-Gamal and Amy Myers Jaffe. Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold, 1st Edition, Cambridge University Press, 2010

Steve Johnson. «State control the ‘worst’ form of company ownership». In: (September 2016)