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The Visible Hand: The Growing Impetus of State-Directed Capitalism

May 29, 18:02 UTC+3
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Since the start of the 21st century, governments from all over the world have been increasingly interfering with the economy, which has had a negative impact on shareholder income and challenged the sustainability of economies with the traditionally high share of the public sector. The Federal Antimonopoly Service keeps warning about the negative consequences of the state's excessive involvement in the economy, but the Government is still reluctant to loosen control over backbone corporations.

The trends that prevailed in the global economy in the first decade of the 21st century made experts talk about a new era of state capitalism. This was mainly due to the increasing share of emerging markets in the global GDP.

  • According to the OECD, in 2015 general government spending as a share in the GDP of 30 member states was 46.8%, while the share of government revenues in their economies reached 44.1%, up 7% as compared to 2001.
  • The Forbes 2016 list of the top 20 global corporations revealed that seven out of them were controlled by the government (all of them were Chinese).
  • According to the Ecstrat consultancy firm, state companies account for 35% of market capitalisation in the emerging nations (vs 4% in the mature economies). State companies are the dominant force in the markets of the Persian Gulf (over 80% of market capitalisation in Qatar and the UAE), in Vietnam, Malaysia and China. Norway is the only developed nation to make it to the top 10 in terms of state companies concentration (over 60% of market capitalisation), while in Russia the respective figure stands at ca. 50%.

The rise in the market capitalisation of state companies occurred in 2005–2008 on the back of strong hydrocarbon prices. Although the high share of the state sector in emerging economies supports growth, it also poses serious challenges.

  • A study of 6,600 public companies from 61 countries undertaken by Ecstrat for Copley Fund Research shows that in 2005–2016 the aggregate returns of state companies' minority shareholders were below 10%. In contrast, companies with a dispersed ownership structure delivered aggregate returns of 50%, while privately owned companies did far better still providing returns of 100%.
  • In 2016, Moody's Investors Service flagged worries over China's excessive leverage (280% of GDP), which threatens the stability of the world's second largest economy. The lion's share of that debt is attributable to state companies, so China intends to address the inefficiency of government-owned structures by shutting them down or transforming them in line with the free market principles.
  • The oil and gas giant Petrobras was controlled by the Brazilian government and viewed as a backbone element of the nation's economy until a corruption scandal broke out around the company's management in late 2015, triggering a political and economic crisis in the country. 
  • State-owned banks represent 75% of India's banking sector. In their portfolios they have a lot of NPLs issued over the past few years to infrastructure and steelmaking companies. As a result, claims Prabodh Agrawal of IIFL Holdings, 70% of India's banking system is paralysed. The state banks cannot afford to assume new risks disrupting the flow of working capital into the country's economy.

In April, the Federal Antimonopoly Service produced a draft report on competition in Russia, which qualifies "the substantial share of state-owned business structures" as a key impediment to the country's economy.

  • In summer 2013, the Russian Government approved a forecast plan to privatise state assets in 2014–2016, but due to the adverse economic environment in 2014–2015 it had to put privatisation on hold.
  • The story changed in 2016 when the Government sold its 11% stake in ALROSA, 19.5% of shares in Rosneft and a controlling interest in Bashneft. Those sales brought in additional RUB 1.15 trillion cutting the budget deficit by 1.2%.
  • In February 2017, the Russian Government approved a forecast plan to privatise federal property in 2017–2019, which, among other things, includes the sale of the Government's entire stake in the authorised capital of the Novorossiysk Commercial Sea Port and a sell-down of ALROSA, Sovcomflot and VTB. The federal budget's annual proceeds from privatisation are estimated at RUB 5.6 billion, excluding major state-owned companies.
  • However, so far the Russian Government is reluctant to completely give up on its economic involvement: during a meeting on privatisation held in February 2016, President Vladimir Putin said that the Government should keep its controlling stakes in the backbone state-owned corporations.
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