State Ownership and Improvement of Corporate Governance in Russia

1. State Ownership and Improvement of Corporate Governance in Russia Andrei Yakovlev, Institute for Industrial and Market Studies at State University – Higher School of Economics Moscow, March 19, 2009

2. The problem Strong scepticism in the mainstream literature about the efficiency of government intervention in the economy: • SOEs experience in many countries in 1950-70s – and privatization policy as the consequence in 1980-90s • New evidences on underperformance of politically connected firms (Faccio, 2006; Choi, Thum, 2007; etc) However – a number of papers confirmed alternative view: state ownership can be efficient if market institutions are weak (Ang, Ding, 2006) or depending on quality attributes of products / services supplied (Kwoka, 2005) Russia of 2000s as an interesting case: strong increase in state involvement in the economy and high economic growth ratio

3. Macroeconomic tendencies Deep economic crisis in 1990s (50% decline in industrial production, high inflation, arrears, barter etc.) Financial crisis of August 1998 (4-times devaluation of rubles, default on GKO, resignation of the cabinet) In 1999-2000 – economic growth 8-9%, after that – 6-7% annually; decrease of inflation (about 10% in 2006); huge currency reserves. One of reasons – increase in oil prices, but more important is real improvement of government policy Privatization vs. state ownership Privatization as one of key priorities in 1990s – vaucher mass schemes 93-94, investment auctions 94-95, loan-for-share scheme 95-96. Results: no effect on productivity even 5 years after (Brawn et al, 2006), huge violations of property rights (Black et al, 2000), state capture (Hellman et al, 2000) 2000 - mid 2008: strong CG improvement (information disclosure, IPOs etc.) and 12-times increase of RTS-index Since 2003: strong state intervention (Yukos affaire, Gazprom, Sibneft, OMZ, Power Machines, Guta-bank). Just now – TNK-BP and Mechel… Russian context

4. Why Corporate Governance? • Standard approach: performance measurement. But in the Russian case of 2000s: improvement can be explained by the influence of external factors (devaluation of rubles, increase of oil prices) • Increasing interest in the literature to CG as a system of incentives. A number of studies based on different CG scorecards or ratings (Doidge et al, 2007 etc). • The basic idea – good CG procedures are costly + return on such kind of ‘investment’ can be expected only in mid-term perspective. Therefore CG improvement at firm level can be a signal of real changes in firms’ strategies. I tried to find links between state interventions and the quality of CG

5. How to measure the quality of CG? • For relevant studies is typical to use • scorecard or rating based on the information disclosed by the companies (S&P transparency & disclosure rating) • evaluations of financial analysts (FTSE ISS) But in both cases we can have information only about public companies listed at stock exchanges. • For Russia it is very restrictive approach. • We have about 170,000 open joint-stock companies (result of mass privatization), but only 1000 firms are listed anywhere and in last S&P rating for Russia were included only 80 corporations. • What about the other thousands of Russian firms? • We applied alternative approach. Using survey data (with a number of questions about corporate behavior of surveyed firms) we constructed for our sample CG Index covered both listed and non-listed companies

6. Data description • Survey of 822 large and middle-sized Russian joint stock companies in 64 regions in the Spring 2005. • Surveyed firms represent 10% of all workers employed in 2004 by the industry and communications.

7. Questionnaire • About 150 questions concerning: • General performance of the surveyed companies (output growth rates in 2001-2004; financial conditions; presence and scale of investment; innovation activity; presence of export; etc.) • Their corporate behavior (listing on stock exchanges in Russia and abroad; independent directors at the board; international auditor; regularity of dividend payments; etc.) • Characteristics of ownership structure and control (concentrated/ dispersed ownership; state/ private/ foreign shareholders; affiliation to the business groups) • Indicators of indirect ‘political connection’ (participation of top-managers in advisory bodies acting under different levels of government; top-managers worked before as public servants; financial and organizational support from authorities; participation in state procurement; etc).

8. The methodology • A set of ordinary probit-regressions for checking my hypothesis that connection of firm to the government can be positive for the quality of CG (under Russian conditions of the early 2000s) • As dependent variable – CG_Index based on 13 questions about corporate behavior of surveyed companies • Two explaining variables reflected the influence of the government on the quality of CG: State_Owner (dominant shareholder, minority shareholder, no governmental stake) and Polit_Connect (based on 9 questions about indirect links between firm and government) • A set of control variables (Size, Sector, Region, Finance, Dominant_Owner, Foreign_Stock, Business_Groups, Foreign_Exp)

9. Construction of CG_Index

10. Value of CG_Index To avoid the overestimation of CG quality (due to close interrelation between some variables) we divided the sample in the 5 categories (0-20%; 21-40%; 41-60%; 61-80%; 81-100%) depending on the total score of CG_Index

11. How to evaluate the influence of the government on CG? (1)

12. How to evaluate the influence of the government on CG? (2.1)

13. How to evaluate the influence of the government on CG? (2.2) • To avoid the overestimation of political connection I divided the sample in the 3 categories depending on the total score of Polit_Connect Index • As expected there is high correlation between State_Owner and Polit_Connect (Pearson Chi-Square = 0,000) but about 18% of private firms have high level of political connection and 45% - moderate

14. Empirical results: model 1 (State_Owner)

15. Model 1: comments • Four specifications: in all cases firms with stake of government have significantly higher quality of CG • Test of robustness: • Model 1.0: only State_Owner and Size, Sector, Region variables • Model 1.1: a number of new variables affecting the quality of CG (Finance, Dominant_Owner, Foreign_Stock, Business_Groups, Foreign_Exp) • Model 1.2: SECTOR_reg instead of Sector variable • Model 1.3: all firms listed at foreign stock exchanges are excluded (due to their higher level of CG) • Results are more robust for minority shareholding of government

16. Empirical results: model 2 (Polit_Connect)

17. Model 2: comments • Four specifications of model 2 – only Polit_Connect and Size, Sector, Region; + other control variables; + SECTOR_reginstead ofSector variable; + regression only for private firms. In all cases Polit_Connect variable was not significant • A number of control variables is significant (the same as in model 1): • Positive influence on CG: Size, Sector_reg, Finance, Business_Groups, Foreign_Stock • No influence on CG: Foreign_Exp and Dominant_Owner

18. Discussion of results • Main conclusions: • State controlled and mixed firms in Russia demonstrated higher quality of CG (that isclose to experience of Singapore of 1990s - see Ang, Ding, 2006). These results are more robust for minority shareholding of government • ‘Political connections’ did not have any influence on CG • Regulation of entry, tariffs etc acts as an additional channel of state influence (quality of CG is higher in regulated sectors) • Possible essential interpretation: in 1990s Russian government as an owner suffered from management abuses. In early 2000s government started to use standard CG instrument to defend its own property rights. • But on the base of our empirical data I can attribute this positive effect of state ownership only to 2001-2004. Evaluation of current trends is an open question.