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Liberation From Monopolies as a Key to a Free Country

When we are discussing the contours of some concrete reforms in future democratic Russia, most often we are talking about the restructuring of the autocratic institutions, the strengthening of the role of the parliament, local self-government, ensuring actual independence of the courts, and measures to fight against corruption.

We dwell much less on the transition in the economic sphere. This is quite justifiable for it is by far much more interesting to discuss parliament and courts with a wide audience, while the economy is a more complex subject matter, moreover, it requires some special expertise.

At the same token, the socio-political system, which has developed in Russia under Vladimir Putin was inextricably intertwined with the economic model that he had been building for all his 20 years in power. It is important to understand that unless the present state-monopoly structure of the economy undergoes transformations, then, in the future the cartel of monopolies that are controlling the Russian economy today would be capable of corrupting any institutions and take control over the parliament, the courts, as well as everything else. In other words, unless there is a main economic reform carried out, namely the de-monopolization of the Russian economy, then very soon everything would go back to square one, because the system of behind-the-scenes clan-corporate influence on decision-making process is not going to go anywhere, and most of the cash flows would remain in the hands of the largest corporations, paired with their disproportionately heavy-hitter political weight.

Nowadays, rather few people talk about it, nevertheless, the solidification of the authoritarian power under Vladimir Putin was happening hand in hand with the strengthening of the monopoly in the economic sphere.

We are accustomed to saying that the Yukos case, and the arrest of Mikhail Khodorkovsky in 2003 took place “because Khodorkovsky had funded political parties in opposition.” However, very few analysts draw connections with the desire of the state-owned Rosneft and Igor Sechin, who stood behind it to seize the country’s largest private oil company and become the de facto the leading oil monopoly.

In that case, political competition was directly connected to the economic one, until Russian oil industry remained competitive, and in most parts privately owned, it supported the competitive political environment (the Yukos owners did not agree to integrate into Putin’s vertical of power ). As of today, right after many years of persistent concentration of the key economic assets in the hands of a narrow bunch of the state monopolies, the country does not have a rudimentary financial basis to fuel any political competition.

Authoritarianism is beneficial for monopolies since it supports their market power. It creates all the required preferences and barriers for competitors, attempting to enter the market, in exchange for that the monopolists generously lube up those in power folks up top. Monopoly is advantageous for the authoritarian rulers for it gives them an easy control over the cash flows and gives guarantees of their stay in power. It is the monopolies that are the source of the demand for bad institutions, for it is more convenient for them to fish in shady murky waters, while under the rule of law, wide political competition and a plummet in the degree of favoritism in the decisions made by the officials. They are facing some fierce competition and a possibility of losing the market. Собственно, смысл путинской политико-экономической модели ровно в этом симбиозе автократов и монополий. As a matter of fact, the essence of Putin’s political and economic model is embedded precisely in this symbiosis of autocrats and monopolies.

There is yet another problem: monopolies are the biggest constraining factor in the economic growth. They support barriers of the market entry for the new players, inflate prices, consume resources inefficiently, and they are a breeding ground for low productivity in the economy. Another key threat coming from the state monopolies is as follows: since they are perpetually aiming at expansion and absorption, they are factually killing the private sector of the economy.  As of today, the large government agencies have made their way into the IT sector and retail as well. Let us refresh the memories of the acquisition of the IT companies by Sberbank, or the buying out shares from such retailers like “Magnit” and “Lenta” by VTB Bank.

A potent deterrent factor for the economy is the oligopolistic cartel of the state-owned banks as they are in no rush to lower the interest rates on loans, but they actively reducing their interest rates on the deposits, eventually making record earning profits on the bracket between interest earnings and spending, riding the weakened economy, which has been lying in a coma for many years in a row. These earnings, in their turn, would continue be funnel towards future acquisitions of the assets, squeezing with renewed vigor the more productive private sector right out of the market.

The monopoly of transportation companies, such as Russian Railways and “Aeroflot,” also delivers a blow to the economic growth, and holds in check the mobility of the population. A great many people complain about the ticket prices for domestic Russian flights being more expensive than for travel in Europe.

However, very few reckon that this is a direct outcome of the rapid monopolization of both; air transportation sector itself, as well as of the related sectors that adds up to the main costs of airlines. As of today, “Aeroflot” is already in control over more than half of the domestic air transportation market, contrary to the situation a decade ago, when it owned only a third share of it. In the fuel market, where the 4 largest oil companies account for the 75% of the entire oil production and more than 80% of the oil refining capacities, the there is a fast consolidation of control over regional airports by the adviser to Igor Sechin’s holdings – Roman Trotsenko, as well as by Viktor Vekselberg and Oleg Deripaska.

Therefore, the high level of monopolization of the Russian economy (as it appears so visually as one can easily be rest assured by looking at the ranking of the largest Russian companies RBC-500 is a threat to the future political system, as well as to the prospects for economic growth, since the monopolistic economy would attempt to corrupt the political system and seize control over its institutions.

The fact that the economy, which was built on the basis of state monopolies a priori cannot yield growth, and it was exactly that economy, which deprived us of any prospects, as it has been stated over & over again. There’s one more important thing in this regard, if the new democratic government in Russia is uncapable to ensure a rapid come back to the  economic growth, then the possibilities for political transformations will decrease fast, and the country can expect a quick roll back to the political system, which is overrun by the oligarchy behind the scenes via the populists, who were sponsored by them, or a new authoritarian restoration. We can now observe similar processes underway in the post-Soviet countries, which appear to have made an attempt to part with the authoritarian past, however later on stumbled on the path of the economic reforms such as: Georgia, Moldova, and the same holds true for Ukraine as well.

Meanwhile, the de-monopolization is an essential resource for a rapid economic growth due to increased productivity and efficiency, resulting from the development of competition, containment and lowering of the prices, removal of the barriers for the investors, the disappearance of corrupt rents and conditions of patronage & favoritism by the officials.

We can observe how an effort to reform institutions without de-monopolization of the economy looks like, using the example of post-Maidan Ukraine. Despite the fact that 6 years that have passed since Yanukovych was overthrown, the monopoly structure of the economy remains the same: both in oil and gas (the state-owned “Naftogaz” fully controls gas industry and no attempts have been made to de-monopolize it). Also, in the transportation sector, and in the banking system (almost 60% of the assets are controlled by the 4 largest state-owned banks). As the result the economic growth is weak, the reserves of de-monopolization have not been used for these purposes, and the society still has a strong feeling that the oligarchs still retain the decisive influence over economy, which is one of the top 3 most crucial problems the country is pegged with according to Ukrainians. At the same token, there are no clear-cut plans for the de-monopolization, and the pace of economic growth is shifting into a low gear. Thus, it is of little wonder, that this is mirrored in the dented ranking of the president Vladimir Zelensky.

We, in the “beautiful Russia of the future,” would certainly need to take this experience into consideration and de-monopolize the economy in a sufficiently quick manner. The monopolies could not be allowed to stonewall the rapid growth of the economy and corrupt the Duma members as well as the state officials behind the scenes, while the parliament would be discussing the new constitutional model.

The preservation of the monopoly model in the economy will create the whole number of institutional traps for the new government, without it future rapid achievement of the high growth rates its rating would start decline, thus creating conditions for an oligarchic, or even for an authoritarian restoration.

Monopolies will quickly present its demand for corrosion in the institutions. The desire to “steer the cash flows” of the state owned monopolies will create the wrongful incentives for politicians – the place of public interest will be overrun by prioritized attempts to seize power, with a quick pay day, because the monopoly money would create a convenient slush funds pillow to finance the propaganda and to buy the loyalty of the establishment and society, as it was happening in years of Putin’s reign. Also, even the newest democratic government will be lured by temptation to “rock on and get into the driver’s seat” with the big money, instead of focusing on the important reforms for the benefit of the entire society. Therefore, one needs wean oneself off monopolies’ cargo as soon as possible.

So, is there a plan in place on how to do this? Yes, there are a lot of ideas, for example, there is a comprehensive report on the de-monopolization of strategic sectors of the Russian economy: the banks, the oil and gas sector, transportation, telecommunications, which we have prepared along with Mikhail Khodorkovsky’s “Open Russia” three years ago. In spite of the widespread misconceptions, the de-monopolization can be carried out quite quickly, and, in a couple of years, yesterday’s monopoly segments of the economy will become competitive. In these regards, the experience of the United States, is extremely useful for Russia, as it has been for more than a hundred years pursuing a consistent and very stringent policy of oversight in the key sectors of economic concentration. As it turns out, the lawmakers in the US had not allowed the uprising of the national oil monopoly Standard Oil, by splitting it into smaller companies. As a result of that action, America did not get its own Rosneft emerging. There the largest oil companies are producing no more than 5-6% of the total volume of oil production nationwide. On the other hand, the United States continues to remain an everlasting source of innovation and technological revolutions in the oil industry (deep marine shelf, shale, and so on).

By the same token the same story is true for its electric-power and gas industries. The competition promotes stabilization or lowering of the prices for the consumers, which enhances the competitive ability of the US economy. Have you heard a great deal about the reduction in prices for electric power and gas in Russia? This is a rhetorical question. And, in case you are not happy with the inflated prices for the airline tickets in Russia as of today, then explore the ways how American regulators have vigorously fought against the merger of American Airlines and the U.S. Airways in the recent years, in order to comprehend the level of  the in-depth realization by the authorities of developed countries of the vital importance of commercially viable competition. We do not even need to say anything in these regards about European regulators, as the policy of de-monopolizing at the European energy markets has delivered a serious blow against Gazprom’s super profits and made is possible to lower prices for European consumers.

Speaking of which, yet another important and interesting topic is the de-monopolization of the media market and related infrastructure (telecommunications). As of today, this field in Russia is associated with an prohibitively excessive concentration and influence of the state in the area, which is present not only in the form of state control over the media, but also in the shape of monopolization of the infrastructure (FSUE – Russian Television and Radio Broadcasting Network).

There should not ever be such a degree of state oversight over the mass media outlets, in any democratic country, nor over the supporting backbone of the communications infrastructure. Otherwise, it is not going to take long at all for the one-party system to return with vengeance.

How does one achieve competition in the mass media outlets and broadcasting network? There are different recipes, for instance, Alexei Navalny in his presidential election program has proposed to limit the ownership shares in the of large media outlets directly to prevent the monopolization of the market. Nevertheless, it seems to me that the most effective way is to ensure the presence of the maximum amount of constantly competing among each other mass media outlets on the market.

The usual artificial limitation of the amount of “television buttons”, television companies that were granted  access to the digital multiplex, to the radio frequencies – this is a direct way to monopolize the media market by few players, who could be easily whipped into submission by the up top people in power. It is necessary to attain the exact opposite result, so that it would be technologically extremely difficult to monopolize control over the mass media outlets. In order achieve this, the policies in media and communications spheres should be focused on maximizing the use of frequencies, and on creation of competing signal transmission systems. This is the only way to ensure once and for all the elimination of the system of few dominating “buttons”.

Thus, all of these: courts, corruption, strengthening of the role of the parliament – they all are crucially important. However, one should not underestimate the importance of pivotal economic reform in future Russia, the main element of which should become the de-monopolization of the Russian economy. We can discuss the detailed recipes for this reform/The detailed recipes for the reform can be discussed further, but without the de-monopolization, even when Russia is freed up from the dictatorship, it  will promptly be faced with the risk of encountering a new wave of oligarchizing and the restoration of the authoritarian regime.

The author is Vladimir Milov, politician, economist, public figure.

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