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B. Grozovsky. Chief owner of the country. // Vedomosti, 13 of February Section Institutional Problems - Early 2007 a control block of shares of the Siberian Coal and Energy Company (SUEK) producing 1/3 of the energy coal in Russia was acquired;

- Gazprom and Rosneft was offered to buy out the shares of the Russian shareholders in TNK BP while Gazprom expressed interest in getting rights to a 75% block of shares in Kovykta gas condensate field (simultaneously the tax, environmental and other regulatory authorities should issue claims to TNK BP).

The analysts note an obvious slow down of the production rates in the oil and gas industry in 2005 2006 as compared to 2000 2004 as a result of the oil and gas assets placed under control of the state corporation35, and due to gas shortage for internal consumption in the national gas balance starting 2007.

One of the 2006 deals at the M& A market with the involvement of the state companies was the purchase by FGUP Rosoboronoexport last fall of 66% of shares of a leading titanium and magnesium producer (30% of the world produc tion) JSC VSMPO Avisma36 (the deal value is $700 million). In the shadow of this event was the acquisition by Oboronprom, a Rosoboronexport subsidiary, of the control block in LEPSE (Electric Engineering Company in Kirov), one of the major Russian companies producing electric equipment for the defense and car building industries. Further plans of Rosoboronexport expansion may be related to metallurgy and not only in Russia. In summer 2006 the Rosoboronexport man agement raised the issue of the establishment of a state holding that would be a monopoly in the production of specialized steels. Early 2007 CJSC Russpetcstal, a granddaughter of Rosoboronexport purchased 100% in JSC Metallurgical Plant Krasny Octyabr (Red October) in Volgograd. Among possible future ac quisitions there may be Chelyabinsk Metallurgical Plant (JSC Mechel), Zaporoz hie titanium and magnesium plant, Volnogorsk and Irshansk mining and enrichment complexes (GOKs) in Ukraine, Metallurgical Plants Electrostal (in the city of Elec trostal of Moscow region), Serp i Molot (Hammer and Sickle (Moscow) that are producers of specialized steels for the defense industry.

Since Rosoboronexport increases control over the assets and diversifies the sector structure as a result of various profiles of the respective companies (heli copter manufacturing, metallurgy, car and defense industries), the company may be encouraged to restructure itself by setting up a managing company that would be completely owned by the state. The companies under its control including Ro soboronoesport as an entity that received the monopoly right to exercise military and technical cooperation with foreign countries may become subsidiaries. In fu ture some of the subsidiaries may issue shares additionally.

The functions of a major state financial institutions Vneshtorgbank (99.9% shares owned by the Russian federation) are not limited to the processes of ex pansion of the state into the banking sector where the total amount of the M&A transactions did not exceed $3.5 billion in 2006 (e.g. the take over of Promstroy V. Milov. The echo of ownership re division. // Forbes, February, 2007, p 30.

In 1998 the control block of Avisma shares (Berezniki of Perm region) was acquired by Verchne Saklinsk Metallurgical Production Consortium (VSMPO) in Sverdlovsk region after which two com panies actually integrated.

RUSSIAN ECONOMY IN trends and outlooks bank in St Petersburg). In 2006 this bank participated in the buy out of ALROSA shares and in the mergers made by Rosoboronexport structures.

During 2005 2006 privatization was noted for quite opposite processes. In the 2006 spring message to the Federal Assembly Russias President confirmed again the need of privatization (the state should keep in its ownership only the property which is absolutely required to perform its functions).

In spite of a formal number of blocks of shares put for sale and the decisions to reorganize unitary enterprises, the situation is close to critical. Every year not less than 50% of transactions is suspended due to the absence of demand, and the quality of management of the state owned property is hardly different from that of the 1990es. It looks like the situation in this sector is closely connected with modi fication of views regarding the role of the state sector in the Russian economy37.

From the one hand, one of the tasks of 2006 2008 is to create at least the illusion of completing the privatization as a component of the institutional reforms to sell federally owned blocks of shares and to restructure the sector of state unitary entities. The effect of the process both for the government and the concerned entities is secondary as compared to possible political gains. On the other hand, the increasing state expansion which manifests itself either in the overall economic strategy, or a trivial re division of property in favor of groups close to power, or opposition of the concerned ministries, objectively removes from the privatization process major and most profitable state owned assets.

5.1.6. Stability versus stagnation The problem of stability of the ownership structures and the appropriation rules the reverse side of which is the protection of property rights is most critical in the present Russia. David Hume, a famous Scottish philosopher and economist, stated that no one can doubt that the agreement of the distribution of property and the stable possession of this property is the most needed condition, and after such agreement is concluded, not much is to be done. Stability of possession like the transfer of property by consent and fulfillment of commitments are three basic natural laws (in the terms of the natural right doctrine)38. The significance of stability of these relations for the economy in transition is reassured in certain cases by similarity of the institutional issues and the formation of a developed system of pri vate property relationships.

The most pessimistic forecast of the development of the property related re lationships in Russia looks like the following39. Indeed there are no constructive de cisions in Russia to go away from the power property re division reality40. The latter In April 2006 Yu. Petrov, Head of RFFI, announced that as a result of the privatization some 30 major state holdings should appear in the strategic sectors of the Russian economy.

Hume D. A Treatise of Human Nature. Ed. by Mossner E.C. London, 1969, p. 578.

See: N. Popadyuk. Is the private property in Russia really private // Issues of economy, 2006, 1, p. 152153.

The notion of the power property introduced by L. Vasiliev means primarily that this economic category applies to the entire society; this is a syncretical integrity of the power and property where they are inseparable making a sole phenomenon which is the power property: the power (posses Section Institutional Problems has all the grounds to reproduce itself. All individual fluctuations of corporate or lo cal business models similar to private property will, times and again, fall under this power property continuum because of its immanent logics which sets up the be havior model of the so called private entrepreneurship. The practical logics behind this is like this: the property represented by particular persons will start linking it self with the power to realize its private interests and eventually merging with the power using the latter as a guarantee from possible flaks, while the power, if the private property is legitimate in the country, will continue attempts to possess pri vate property being caught in corruption and getting prestigious top management positions in the so called big private business. The Russian power property may be called re distributional because new teams of the government officials who peri odically come to power with the help of democratic procedures resolve the previ ous problems in a more fair way (transactions of privatization, even when the stat ute of limitations is reduced to 3 years, etc.). Such is the framework setting the rules.

In the modern new institutional economic theory the stability of the institu tional environment is described by the following main criteria: 1) general stability of the established property structures and the appropriation rules during the entire period of long term investments as a key feature; 2) political and legal stability; 3) valid capacity of the judicial system; 4) the culture of contracts and commitments inspiring confidence. None of the said criteria permits speaking about maturity of the institutions established in Russia during the last 15 years. On the contrary, all the above gives grounds for the following conclusions:

1) The asymmetry of economic and political factors of the development of the Russian economy in the 2000es is obscured so far by the general indicators of the economic recovery, unstable feedstock market, and the indicators of the state fi nance (budget surplus, Stabilization Fund, gold and currency reserves), and of ex ceptional profitability of the Russian stock market. In the 2000es a negative impact of the state factor increases while the quality of the market factors gradually decreases. The conclusion of the actions of the state and the market going into opposite directions in Russia during the 2000es is confirmed by the data of socio logical surveys and country ratings.

2) In a long term perspective this problem of asymmetry of economic and po litical factors of the Russian economic development becomes critical primarily in the context of the roles of the political institutions required for the formation of ef fective economic institutions, if to assume moreover that it is the market that is the source of the current growth of the economy, budget revenues and funds for social programs support.

3) During the 2000es a contraction of the potential social base for indirect (via political representation) formation of effective economic institutions is ob sion) generates the notion and the concept of the property while the property emerges as a function of the possession and power. (L. Vasiliev. History of the East. M., High School, 2001, Vol. 1, p.

42.). The term re distributional property is a variation of the power property in the specific his torical context of the Russian state.

RUSSIAN ECONOMY IN trends and outlooks served. Those institutional mechanisms that in the 1990es opposed the expansion of demand for effective economic institutions are functioning now but in a modified form. If before the 2000es (the terms are conventional) we talked about oligarchy capitalism, presently the most common term used is the state capitalism in its Russian modification.

4) In the mid of the 2000es the risks brought into entrepreneurship (in its le galized forms) by the institutions and regulative function of the government re mained significant, however, the impact of a new factor became more pronounced:

the government was obviously restoring its direct interference into the economy.

There was also a strong probability of the relationship between the expansion of the direct and indirect interference of the government and the growing corruption in the 2000es.

5) The mutual influence of such institutions as the property rights protection and the financial system in their present form is rather negative. The absence of in stitutional changes or aggravation of the investment climate by certain directions may have negative consequences for the investment dynamics in the near future or curb the investment growth into the fixed assets of the Russian economy.

6) During entire period of 20002008 the basic objectives of mid term social and economic programs change but insignificantly. The general conclusion on the stagnation of the institutional changes based on such formal base only would be too ambitious, however the above comparison gives grounds to assume that the legislative and regulatory support to the processes of the development of eco nomic institutions in the long term is inadequate. One can talk of a chronic gap be tween the legislation and the economic reality.

7) A specific feature of the 2000es institutional development is the formation of the double standard and different rules of the market game for various classes of the players. The establishment of the double standard at the federal and regional levels creates insurmountable obstacles on the way of the formation of the favor able institutional environment in general and also put brakes to local institutional transformations in the area of the property rights protection, corporate govern ance, financial markets, budget restrictions, etc.

8) By the end of the 1990es early 2000es a situation emerged in the coun try where the economic laws were relatively well developed but the law enforce ment remained very critical. In the mid 2000es the focus apparently changed:

though the diseases of the Russian system of law enforcement were still acute a certain shift took place in the framework of the economy legislation (and its inter pretations) which, on the one hand, increased uncertainty of implications of various economic actions for the business in terms of the government reactions, while from the other hand, tightened the relations between the government and the private business. The problems of the Russian law enforcement system supplemented with the trends of expanding uncertainties and restoration of rigid legislative norms apparently increase the risk zone in the property rights area.

Section Institutional Problems 5.2. Public Sector Transformation and Property Relations Policy 5.2.1. Public Sector Status: Quantitative Aspect Similar to the previous several years, public sector overall quantitative status as of mid 2006 was provided in the Federal Property Privatization Forecast Plan (Program) for 2007 and Key Areas of Federal Property Privatization for 2007approved by the RF Government Directive No.1184 r of August 25, 2006. This document contains data on the number of Federal State Owned Unitary Enter prises (hereinafter FGUPs) and stock holding companies with the RF Government participation as of June 1, 2006.

Let us review the last few years quantitative dynamics of the entities with the above mentioned organizational and legal status by each of the public sub sectors at the federal level.

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