Special vehicles of state intervention in Russia and Kazakhstan.
Kalyuzhnova, Yelena ; Nygaard, Christian A.
INTRODUCTION
The period of 2000-2007 could be characterised for Russia and
Kazakhstan as an era of rapid real GDP growth and speedy catching up
with the pre-transition level. At the same time raising oil prices
allowed both governments to build up significant foreign reserves.
Accumulated resource revenues enabled (re)emergence of a more active
state intervention while rising commodity prices motivated resource
nationalistic economic policies (Kalyuzhnova and Nygaard, 2009).
This paper analyses the link between resource revenues and
financial sector management in Russia and Kazakhstan. Due to
underdeveloped and structurally skewed private financial sectors, the
governments of both countries introduced dedicated financial vehicles
that, in principle, might substitute for the actions of private actors
by directing credit for industrial development and investment. Moreover,
such instruments allow both governments to use these special financial
vehicles to form and pursue national economic policies and priorities.
This paper specifically focuses on such two state investment vehicles
with clear industrial policy remits and roles as agents of their
respective governments--Samruk-Kazyna and Vnesheconombank of Kazakhstan
and Russia, respectively. Nevertheless there exists in both countries a
wider set of state intervention instruments that range from direct
ownership in the form of national oil companies (NOCs) to more indirect
forms such as state banks, equity ownership in private banks and
representatives on key corporate management boards. What distinguishes
these latter forms of state intervention is their arms-length relation
to the governments--relations that are frequently administered via these
special vehicles. Notably, given the structure of state--industry
relations and state power in Russia and Kazakhstan, this distinction
does not necessarily imply a weaker form of control. (1) The paper
further distinguishes between crisis management and the systemic role of
these special vehicles. Though in part interlinked, and to some extent
providing opportunities for opportunistic government behaviour, it is
also clear that the emergence of such instruments represents a
longer-term trend towards systemic reform and institutions of systemic
reproduction.
In the next section we set up the framework of analysis and the
role of the state in financial sector's management. The subsequent
section briefly summarises the financial environment in Russia and
Kazakhstan prior to the financial crisis. The following two sections
analyse the role of the state financial vehicles as crisis management
tools as well as emphasize their systematic role. The last section
concludes the paper with some policy implications.
THE ROLE OF STATE AND STATE INTERVENTION IN THE ECONOMY
What is the role of the state in managing economies and does or
should it somehow differ for emerging economies? Skepticism about state
intervention and links to negative long-term growth consequences have a
long tradition in economics (Evans and Ranch, 1999; Fukuyama, 2004;
Sinch, 1985, etc). Nevertheless, from Smith (1915) onwards there has
equally been a case for state intervention in order to improve the
workings of a commercial society. The provision of some social overhead
investments (infrastructure), funded out of taxes, education and a
judicial system to safe-guard the 'rule of law' were seen as
instrumental in ensuring a prosperous commercial society. Where Smith
did object to state (or any other form) of intervention was with respect
to decisions regarding who would produce what and where.
More recent work on state intervention echoes these arguments. For
instance Reinert (1999, p. 320) concludes that 'successful State
interventions have created dynamic imperfect competition--a process of
dynamic and collective national rent-seeking--which increases enormously
the size of the pie. The State has given temporary help, and with clear
strings attached. Unsuccessful State interventions may at a first glance
look similar to the successful ones, e.g. because also they protect
national manufacturing industries. However, the less successful State
interventions have created static rent-seeking through relatively
permanent protection with no strings attached, leading to a
"shallow" industrialisation, to inefficient monopolies with a
limited potential to increase the pie' (Reinert, 1999, p. 320).
The question of state and state intervention are fundamental in
understanding the effective functioning of any economic system. In the
classical tradition, state intervention is thus predominantly a means of
ensuring that market forces provide a greater degree of social benefits
though increased production. Keynes (1936) argued that in periods where
production contracted as a result of declining demand, leading to
unemployment, the government could additionally adjust its own spending
and taxation to expand aggregate demand and facilitate the re-employment
of idle factors of production (labour). Business cycle management
through aggregate demand adjustment became part of economic orthodoxy in
the post war period and, although of declining practical importance
towards the end of the century, lay behind the large fiscal stimuli
packages observed in developed and emerging economies alike following
the 2007-2009 financial crisis. Moreover, it was argued that government
intervention to ensure macro-economic stability was conducive to
sustainable growth (Fischer, 1993). Beyond aggregate demand management,
economists have argued for state intervention in order to correct market
imperfections or failures (Stiglitz et al., 1993) and externalities
(Broadway, 1979; Herber, 1979; Chambers et al., 1992).
However, another dominant economic paradigm, especially for many
emerging economies, in the 20th century was centred on the ideological
ability of the market to deliver greater prosperity for the many. In
this sense, market imperfection, externalities and socially beneficial
production could not be ensured simply by regulation or correction, but
required the state to substitute for the actions of private agents also
in decisions pertaining to who should produce what and where. While many
planned economies achieved periods of rapid industrialisation and
modernisation, they also failed to develop and absorb many of the
technological and managerial innovations underpinning world growth in
the latter third of the 20th century, as well as a shift to
service/consumer product-based employment. However, as the case of Korea
demonstrates, there are also examples of significant state intervention
(of the form who produces what and where) that successfully managed to
achieve economic catch-up and avoid structural (dynamic) stagnation. An
important explanation for why state intervention worked in Korea was the
state's willingness to withdraw support for once favoured
industries that no longer performed satisfactorily and facilitating
industrial upgrading by removing existing state-created rents and
shifting these to new, more productive industries (Chang, 1993; Ray,
1998). An important vehicle for implementing Korean policy was state
ownership and control of the financial sector that enabled the directing
of credit to favoured industries (Chang, 1993).
The importance of the financial markets and their overall impact on
economies, beyond a developmental argument, is well articulated in the
literature (Fama, 1980; Stiglitz, 1985; Stiglitz and Weiss, 1990;
Greenwald and Stiglitz, 1992). Since the recent global financial crisis,
experts have started to stress the importance of proper regulation of
financial markets (Colander et al., 2009).
In Russia and Kazakhstan elements of each of these arguments for
state intervention are apparent in the development of industrial policy
as well as of economic and legislative institutions. However, another
element may also be discerned. Smith argued that state intervention may
be required to ensure the 'proper workings' of a commercial
society. While an analysis of what constitutes 'proper
workings' is beyond the scope of this paper, we nevertheless direct
attention to the notion of a commercial society. Herein lies a link
between the system of economic production and a system of state and
societal organisation. For emerging economies this is of importance as
it highlights a link between modes of economic coordination and state
building. State intervention and the vehicles for its implementation can
thus become mechanisms for specific political and economic system
(re)production. In a number of resource-rich emerging economies, the
issue of systemic (re)production is closely linked with the emergence of
resource and/or economic nationalist systemic structures (Kalyuzhnova
and Nygaard, 2008, 2009). Recent literature on 'resource
nationalism' has focussed on gaining larger equity shares in energy
projects or renegotiating Production Sharing Agreements (PSAs) with the
aim of redirecting a greater share of revenues to the state or to
parastatal enterprises (eg Domjan and Stone, 2010). Support for such
measures can be found in each of the state intervention justifications
considered in this section, but, from an economic point of view, raises
concerns with respect to tradeoffs between static and dynamic
comparative advantages and economic development.
That such systemic reproduction through state intervention need not
lead to dynamic stagnation is highlighted by the Korean experience.
However, in the case of Russia and Kazakhstan, a powerful static
comparative advantage stems from them being resource rich. Moreover,
resource revenues are instrumental in the design of some of the
interventionist vehicles. An interesting angle in this respect will be
the connection between resource revenues, which the governments are
gaining in resource rich countries and their financial sector
management. The next sections concentrate on how resource revenues are
being directed through special state-controlled vehicles for strategic
economic goals (Kazakhstan) or for economic and social goals (Russia).
(2) Like the Korean case, these vehicles operate via the financial
sector, though Russia and Kazakhstan's sources of rent differ
substantially from the Korean case.
What, then, is the role of the state in emerging economies? This
brief overview suggests a number of points to consider in the following
sections. The State should provide predictable parameters within which
the economy functions--such as law and order, stable property rights,
instrumental public goods and welfare redistributions (Kolodko, 2000;
Aslund, 2007; Kalyuzhnova and Nygaard, 2008), but also a degree of
macroeconomic security through demand side management. If the government
is unable to guarantee all of this, then economic performance may
deteriorate and poverty and governance challenges may mount. Moreover,
managing crisis situations or external shocks will be more difficult
(Frye and Zhuravskaya, 2000). Moreover, emerging economies are
undergoing market transformation, which are complicated even in the
absence of crisis or external shocks (Fidrmuc and Korhonen, 2009; Myant
and Drahokoupil, 2010). The responsibility of the state in this context
is to accelerate market transformation and the acquisition of new
technologies. If the state is unable to meet such tasks, an explanation,
and blame, is in the lack of institutional capacities and the
incompatibility with pre-existing distributions of power or systemic
elements.
THE PRE-CRISIS FINANCIAL ENVIRONMENT
From 1999 to 2008, financial systems of Russia and Kazakhstan grew
rapidly in the context of overall macro-economic stability. Since 1999,
macroeconomic stabilisation such as real GDP growth, low rate of
inflation, positive fiscal balance of the central government took place
in both Russia and Kazakhstan. However, the degree of financial
deepening (cg the ratio of banking credits to the private sector to GDP)
and the efficiency of the financial systems left needed to be improved
throughout the years.
Russia and Kazakhstan also benefitted from a recovery in oil prices
in 2000 leading to substantial export and real GDP growth. However,
while the period after 2000 was also characterised by high investment
levels in Kazakhstan, fixed capital investment in Russia remained
largely unchanged. Kazakhstani growth was accompanied by substantial
international leveraging, while Russia's debt levels were low--also
in comparison with other FSU countries. In 2006 total debt to gross
national income was 103% and 26% in Kazakhstan and Russia, respectively.
Kazakhstani banks had borrowed assets amounting to 84% of GDP.
Credit to the private sector grew rapidly in Kazakhstan, with lower
growth in Russia. Similarly, domestic credit to households expanded
rapidly over the period, with Kazakhstan and Russia again displaying
diverging trends. Unsurprisingly, non-performing loans (NPLs) increased
after 2007 after having generally declined since the early 2000s (Table
1). Overall, the drivers of credit expansion have differed in emerging
markets. In Kazakhstan and Russia, we would argue that energy exports
had a significant impact on private sector credit growth, whereas the
role of western financial institutions was prominent in the non-resource
rich emerging economies (Hilbers et al., 2006).
Oil and gas constitutes some 20%-30% of GDP in Russia and
Kazakhstan; however, they are not typical 'petro-state
economies' (Kalyuzhnova and Nygaard, 2009). Nevertheless there has
been a constant emphasis on diversification in light of both transition
dynamics (the emergence from a planned and heavy-industry-based
development strategy) and longer-term consequences of over-reliance on
mineral extraction. By 2007, the financial and banking sectors played
significant roles in the economic life of the both countries.
The fiscal importance of the oil and gas industry in Kazakhstan and
Russia is shown in Table 2. The importance of oil and gas revenues has
clearly increased over the period 2000-2008. In 2008, oil and gas
revenues accounted for almost half of Kazakhstan's consolidated
government revenues and roughly a third of Russia's consolidated
revenues. While both countries accumulated significant revenues in
respective oil funds, high oil prices and revenue flows also enabled
pro-cyclical policies that contributed to high pre-crisis growth levels.
Moreover, the accumulation of oil revenues during the commodity price
boom enabled substantial fiscal stimuli packages as the financial crisis
unfolded in these countries and large scale capital inflows (associated
with high oil prices and inflexible exchange rate regimes) reversed. In
the case of Russia, its negative non-oil balance increased steadily
during the pre-crisis period amounting to some 4.6% of GDP in 2007.
During and post crisis the negative non-oil balance further increased to
some 13% of GDP in 2009. Notably, much of this non-oil deficit is
structural, with only 9% of budget spending being non-statutory (IMF,
2010). Similarly, Kazakhstan's non-oil balance deteriorated post
crisis.
SPECIAL VEHICLES AB CRISIS MANAGEMENT TOOLS
The financial sectors of both countries developed speedily during
the period 2002-2007/2008. However, the overall trend was unrealistic
with the expectations that banks will 'do more than they can
reasonably accomplish' (Bonin and Wachtel, 2003, p. 2).
The lending issues in the banking sector are linked to the
architecture of the banking system of the Soviet era and the transition
period (Kalyuzhnova and Nygaard, 2009). Relational lending dominated the
allocation of credit following the 1998 financial crisis (Bonin and
Wachtel, 2003; IMF, 2004), posing a significant barrier to renewed
private sector credit expansion post crisis as NPLs increase, but
structural lending issues continue to draw resources away from
potentially capacity-constrained enterprises (IMF, 2010).
Kazakhstan
Since the early 2000s' Kazakhstan's economy has been
growing rapidly, with an average real GDP growth of 10.1%. This growth
was driven mostly by rapid credit expansion, higher oil prices and
production, strong domestic consumption, but also specific policies to
siphon off windfall revenues into the National Fund of the Republic of
Kazakhstan (NFRK).
From July 2007, Kazakhstan's banking sector was affected by a
financial crisis because banks had borrowed heavily on international
capital markets. Another reason was 'the bursting of a speculative
bubble in the residential property market, which has still not
recovered' (Nuttall, 2008). So, in the analysis of the 2007
financial crisis in Kazakhstan we could highlight several factors,
foreign borrowing and a housing market bubble, that are inter-connected.
Much of the banks' foreign borrowing was to fund lending for real
estate purchases; the gap between world interest rates, at which
Kazakhstani banks could borrow because of the country's good credit
rating given its current account surplus from oil revenues, and domestic
mortgage rates kept widening, partly driven by moral hazard affects that
promoted over-optimistic lending at inflated nominal interest rates,
such intermediation was highly profitable for the Kazakhstani banks as
long as the Tenge/$ exchange rate remained stable and creditors did not
default, but it collapsed in the second half of 2007 as the housing
bubble burst and borrowers defaulted. The US financial crisis
exacerbated the situation in 2008 as cash-strapped foreign creditors
refused to roll over loans.
The main issue for 2008 was the leverage within the banking system,
which represented approximately 50% of Kazakhstan's total external
debt. Bank leverage became a significant hurdle for growth in 2008. The
situation in the banking sector deteriorated significantly due to the
slowing economy and exchange rate devaluation. NPLs were increasing
sharply. Although in 2008 there were several banks that managed to repay
loans and bonds, the questions about the value of external assets and
capital adequacy remained unsolved. Therefore, in 2009, the Kazakhstani
government's big bank bailout programme was introduced, which was
directed at Bank Turan Alem (BTA), Alliance Bank, Halyk Bank and
Kazkommertsbank, the country's four largest banks. The decision to
intervene in the banks came partly in response to concerns that they
might face difficulties meeting their debt repayments. Kazakhstani
commercial banks faced USS11 billion in external debt repayments in
2009. 2008 represented a turning point for the banking system with major
stresses on both liquidity and quality of assets. From 2008, banks have
significantly tightened leverage criteria for corporations.
Overleveraged corporations and banks, which have funded themselves
mostly through debt over the past 3 years, are currently being directed
to the equity markets.
With a fall in oil prices following the financial crisis,
Kazakhstan became economically more vulnerable and the deepening crisis
had a significant impact on the wider Kazakhstani economy. The
Kazakhstani government revised its 3-year budget plans and based its
2009 budget on an oil price of just $40/bbl for 2009 and $50/bbl for the
next 2 years. At the end of 2008 a stabilisation plan of the KZT2.2
trillion ($18.3 billion) (3) was approved, the core of which was to
soften the negative socio-economic consequences of the economic decline
in Kazakhstan as well as to provide a basis for future economic growth.
The executor of this programme is The National Wellbeing Fund,
which is a merger of the state holding company Samruk and the Kazyna
national investment fund. (4) The main elements of the programme are
presented in Table 3.
Total foreign exchange reserves stood at US$46 billion at end 2008,
including US$27 billion in the NFRK, the oil stabilisation fund, the use
of which to fund rescue packages for the economy has been authorised by
President Nazarbayev. It was the availability of Kazakhstan's oil
revenues, stashed in the NFRK, that made it possible for the government
to respond quickly to the 2007-2009 crisis, taking over BTA and Alliance
Bank in early 2009 and injecting capital into other top four banks. The
government and other state-run institutions are still expected to retain
this central role for some time. Samruk-Kazyna is unlikely to exit its
investment in BTA in the next 3 years, although earlier sales of its
stakes in the smaller Alliance Bank and TemirBank are very much on the
agenda.
Russia
In Russia the ongoing crisis has resulted in the merger and
acquisition of a number of smaller, banks by the larger, predominantly
state-owned, banks, agencies and corporations and the government has
intervened to ensure availability of liquidity for banks and capital to
refinance maturing foreign loans. Overall, commercial state-owned banks,
Sberbank, VTB-Bank and
Gazprombank, Russia have strengthened their position vis-a-vis
private banks throughout the financial crisis. Table 4 shows the market
share of Russia's 10 largest commercial banks.
Table 5 summarises some of the main crisis measures until the end
of 2008. An important vehicle for implementing several of these policies
is State Corporation Vnesheconombank (VEB)--'Bank for Development
and Foreign Economic Affairs'. VEB's history goes back to the
establishment in 1924 of the Bank for Foreign Trade of the USSR, but it
emerged in its present guise as one of the Russian government's key
investment instruments following the merger of Vnesheconombank USSR, the
Russian Development Bank (RDB) and Roseximbank in 2006. However, already
prior to this, VEB's role as a government agency was strengthened
with the restructuring of its activities in 2002; to reduce its
commercial business and to give greater priority to supporting
government reforms.
In December 2008, a list of 'system-forming enterprises'
was established that were to be supported by VEB, Sberbank and
Gazprombank. These companies produce some 85% of GDP. As a 'crisis
management' vehicle VEB has acted along a number of lines,
refinancing 10 Russian corporations' debt to foreign banks;
providing subordinate loans to 17 banks; shoring up the Russian stock
market; facilitating the rehabilitation of two domestic banks (plus a
Ukrainian bank); extending state guarantees to banks that lend to
priority (system-forming) sector enterprises. Much of the assistance
directed via VEB in the first instance has been further disseminated via
the above commercial state-owned banks.
A tranche of $50 billion was transferred to Vnesheconombank (VEB)
in order to assist Russian companies with refinancing of foreign debt;
at the end of October 2008 some $7.8 billion was made available to
companies in the fuel and energy sector, metal and construction
industries (www.veb.ru). For instance, RusA1 secured a $4.5 billion
bailout from VEB to refinance western loans, effectively ensuring that
the company remained Russian owned. Overall, some 65% of the approved
refinancing resources (total $14.3 billion) went to the smelting
industry with another 15 and 16%, respectively, directed at 'oil
production, petro-chemistry and chemistry' and 'high
technologies' refinancing.
Through October and November 2008, 365 billion roubles were
transferred from the National Welfare Fund to VEB (www.minfin.ru);
enabling VEB to invest some $740 million in Russian shares in October.
Reserves, which peaked at just under $600 billion in August 2008,
dropped to $485 billion at the end of October 2008 as the Central Bank
of Russia (CBR) intervened to stabilise the rouble exchange rate. In
October 2008, the rouble was allowed to depreciate in a series of
step-wise devaluations that halted the rapid drain of foreign reserves
needed to maintain the mid-2008 value of the rouble. By mid-January
2009, foreign reserves declined an additional $60 billion. The rate of
reserve decline afterward reversed with reserves at $412.6 billion and
$461.2 billion in July 2009 and 2010, respectively.
A number of measures were implemented to assist the banking sector
throughout the global crisis, but much of this support has been aimed at
state-owned banks and banks of systemic importance. Moreover, as NPLs
begin to accumulate it is likely that further merger and acquisition
activity will reduce the number of banks. Average NPLs in the Russian
financial sector increased from a low of 2.6% in 2007 to 11.2% in 2009
as the effects of the financial crisis spread in the economy, with
private banks generally worse off than state-owned banks. The two
largest private banks, AlfaBank and MDM bank, have 10% and 7.2% NPLs,
respectively. In Kazakhstan the effects of the financial crisis were
evident already in 2007 and the effect on NPLs is more evident in Table
1.
SPECIAL VEHICLES AS STATE AGENCIES AND THEIR SYSTEMIC ROLE
The accumulation of oil and gas revenues in dedicated
'oil-funds' has enabled Russia and Kazakhstan to develop
investment structures beyond the standard banking system and/or the
money multiplier effect (Kalyuzhnova and Nygaard, 2009), that are to
promote investment and reduce bottlenecks in industry and
infrastructure. The rest of this section sketches the various dedicated
structures to support the economy's diversification. It is evident
from the theoretical part of this paper that the market in Russia and
Kazakhstan did not deliver sufficient social overhead investments and
hence governments intervened and provided credits to both Samruk-Kazyna
and Vnesheconombank for infrastructure development.
The creation of specific state investment vehicles must also be
seen as a government response to investment barriers. Lending criteria
centred on public-private partnership (PPP) type arrangements are thus a
means of ensuring greater private sector involvement and a means of
reducing perceived transaction costs. However, an alternative, but
(partially complementary) reading of this policy is that it embodies a
recognition and acceptance of the state's obligation to create an
institutional framework that can compensate or complement
'standard' market-based financial intermediation where some of
the systemic risk is linked to market uncertainty originating with the
state itself. This, of course, additionally gives the state greater
leverage in the allocation decision, but also exposes these investments
to greater inefficiencies if allocation decisions reflect non-commercial
objectives. In Russia, accumulated oil revenues have been instrumental
in creating such an investment vehicle.
Kazakhstan
In order to overcome inefficiency of resource allocation in
Kazakhstan, there is a desire to boost competitiveness of the economy
via diversification, which is demonstrated by governmental documents
such as Strategy of Innovative Industrial Development of Kazakhstan for
2003-2015, 2004 Cluster Development in Non-Extraction Sectors of the
Economy (see Kalyuzhnova, 2008). In order to do so, since 2006 the
government has engaged in the creation of various state development
institutions with a stronger government presence such as Samruk or
Kazyna fund.
The Sovereign Wealth Fund Samruk-Kazyna was established in October
2008 as a result of the statutory consolidation of these two state-owned
holding companies. Samruk was a state-owned holding that owned and
managed national companies in key industries, such as oil and gas,
transportation, energy, telecommunication, nuclear power and
petrochemicals. Kazyna, which was a state-owned holding that owned and
managed national financial development institutions to promote the
development of non-extractive industries in Kazakhstan. The purpose of
the new fund was to enhance the competitiveness and sustainability of
the national economy and to ameliorate potential negative impacts from
changes in the world markets on economic growth of the country. (5) The
mission of the fund was to manage state investments, to diversify
economy, and to increase the competitiveness of the Kazakhstani economy
(Kalyuzhnova and Nygaard, 2009). Kalyuzhnova and Nygaard (2008a, b)
argue that state ownership or intervention in the resource extracting
industries can be detrimental to long-term growth if such ownership
fails to direct resources to their most productive use. With respect to
Samruk-Kazyna, a similar caveat arises in relation to its
diversification strategy. Samruk-Kazyna believes that
'diversification and modernization of national economy can go
efficiently through active investments especially in such prioritized
sectors as: oil and gas; power energy; metallurgy; chemistry and
petrochemicals; and infrastructure' (Samruk-Kazyna webpage n.d.).
(6)
The 'official' purpose of Samruk-Kazyna is 'to
manage shares (interests) of national development institutions, national
companies, and other legal entities it owns to maximize their long-term
value and competitiveness in the world markets' (Samruk-Kazyna
webpage n.d.). Samruk-Kazyna is acting as a state financial vehicle,
providing Kazakhstani government support in order to attract investments
in the real sector of the economy. Therefore, at the present time,
Samruk-Kazyna is an arm of the government with a total market
capitalisation of around $30 billion.
The main objectives of the fund were initially stated as increasing
of competitiveness and sustainability of the Kazakhstani economy, but,
since the beginning of 2009, it is possible to observe the emergence of
Samruk-Kazyna as a key governance vehicle and institution in the
Kazakhstani economy. Since the financial crisis affects all sectors of
the economy, Samruk-Kazyna assumed the role of the state rescuer.
According to CEO Kairat Kelimbetov, Samruk-Kazyna has become an internal
investor responsible for the financing of the country's economy in
a time of a crisis, but, in reality, the process of state consolidation
of economic assets is taking a place. Samruk-Kazyna adopted the strategy
(with support of the government) of replacing the external financing
from the western banks with long-term financing. Of course the
government did not have sufficient means for such an expensive strategy,
and, therefore, it took a $10 billion credit line in China, a $3.5
billion credit line in Russia, through Vnesheconombank, and a $1 billion
credit line in the UAE. As we can see, the borrowing has a political
platform, from state to state and, of course, the use of these credits
will be more strategic rather than economic.
The high profile given to Samruk-Kazyna in 2009 was a reaction to
the perceived failure of the Kazakhstani banking system, which had
frittered away the opportunity provided by the oil boom by funding a
housing bubble rather than providing loans to promote economic
diversification. Although Samruk-Kazyna may not do better, data on the
share of SMEs in Samruk-Kazyna's portfolio are a powerful
indictment of Samruk-Kazyna as a venture capitalist, see Kalyuzhnova and
Nygaard, 2009, but the government seems to believe that it can. A better
response to the 2007 banking crisis would have been regulatory reform to
increase the costs to bank managers and owners of excessive risk-taking.
Originally, the government stated that their priority will be the
support of the local banks in order to provide for the stability of the
payment system, to maintain necessary lending to the real sector of the
economy, and to maintain the investment attractiveness the country at
the highest possible level. In December 2008 the government stated that
it's intention was not to purchase a controlling stake in the
banks.
However, by May 2009, Samruk-Kazyna had acquired stakes in the four
largest commercial banks: Kazkommerts (25%), BTA (75%), Halyk (25%),
Alliance (76%) (Table 6). These banks represented 67% of assets, 65% of
equity and 73% of deposits of the whole banking sector in Kazakhstan.
Without doubt, obtaining an ownership stake in these banks increased the
state's systemic role in the economy. One of the former leaders of
BTA stressed that 'the antagonism was already built into the
wording of the amendments to the law. The government was not seeking for
means of supporting banks, it was seeking for means to seize
control'. (Interview 23 July 2009, Reading, UK) No doubt, every
opinion has a subjective connotation, and although on one hand it might
be true that the Kazakhstani government has exercised a certain degree
of toughness towards banks, on the other hand, the financial crisis
exposed underlying vulnerabilities in the Kazakhstani banking sector.
The Kazakhstani authorities were put in a situation where they had to
respond with a large-scale policy package in order to prevent a collapse
of the banking system and limit the impact on growth and employment. So,
the systemic role of Samruk-Kazyna is the expansion of controlling the
flows of credits to favoured investment sectors. The effect of the
crisis enabled the state to rapidly expand the systemic role through its
crisis management. So, in essence, we could see the combination of the
two roles: crisis management and the systemic role, where the former has
been instrumental in expanding the latter.
A key issue is whether and to whom Samruk-Kazyna will divest its
bank holdings. If they are re-privatised, that will ease our
reservations about the increasing inefficiency of financial
intermediation in Kazakhstan, but, if Samruk-Kazyna hangs on to the
banks or they become state-controlled in another form, then that would
be bad for the Kazakhstani economy.
Russia
A series of Presidential State of the Nation addresses emphasised
the need to overcome infrastructure bottlenecks in the Russian economy.
The restructuring of Vnesheconombank in 2002 and 2009 thus fits within a
longer-term trend to improve investment and investment allocation under
state direction. However, Vnesheconombank's overall weight in
industry investment is significantly less than in the case of
Samruk-Kazyna. VEB's investment-loan portfolio as a share of total
fixed asset investment in 2009 amounted to some 4% (VEB, 2010). While
the structure of VEB's role as a 'state economic policy
instrument' (VEB, 2010) emerged prior to the financial crisis, its
role as an agent for government policy implementation was enhanced
during 2008-2009 as the government introduced a range of policies to
support the Russian economy--many of these measures were delivered by,
or through, VEB. In 2009 Vnesheconombank was established as a VEB Group,
with banks dedicated to specialised lending functions in different
economic sectors including leasing, investment and engineering.
At the end of 2007 and shortly before Government Decision No. 892
on dividing the Oil Stabilisation Fund came into force, 300 billion
roubles were transferred from the Oil Stabilisation Fund to capitalise
the state-owned Vnesheconombank (VEB) and the state-owned Russian
Nanotechnology Corporation. (7) This transfer should not be confused
with the various crisis related transfers referred to earlier and
underlines the emergence and implementation of a more active role of the
state in directing economic activity in Russia.
According to VEB's corporate strategy, its main goal is not
commercial or shareholder value-oriented, but instead to act as an agent
for the Russian government's 'social and economic development
initiatives rather than to generate profit' (www.veb.ru). As a
government agency, VEB does not operate with a banking licence issued by
the CBR. Its main activities are supposed to overcome infrastructure
bottlenecks, upgrade and promote non-raw materials sectors and support
SMEs, although its remit expanded during the financial crisis to include
supporting the financial sector and 1500 'system forming
enterprises'.
Part of VEB's investment strategy is centred on PPPs. Given
low levels of investment in Russia, especially, but more generally the
risk of private sector crowding out, PPP investment is seen as a means
of ensuring greater investment efficiency. However, the degree of state
ownership in major industrial sectors raises a question whether PPPs
will in fact turn out to be public 'partially public'
partnerships.
Two of VEB's objectives are to support the SME sector and
non-raw materials sectors. The RDB was the SME arm of VEB. (8) With the
full integration of RDB into the VEB corporate structure in 2008, the
former's charter capital was expanded by an additional 10 billion
roubles.
VEB's lending profile has fluctuated over the past 5 years
{see Kalyuzhnova and Nygaard for 2006-2007 figures), but with a strong
emphasis on infrastructure development, especially in the energy
sectors. In 2009 (2008) some 40 (48)% of its lending was directed to
infrastructure projects including sports and the Olympic Games, energy
infrastructure and special economic zones, 25% (na) to the
agro-industrial sector, with oil and gas (narrow definition) receiving
some 3 (9)% of loans.
It is also notable that two-thirds of its financial lending in 2007
was to state-controlled companies. Following the crisis, SME activity
increased, and there is a recognition that developing the SME sector can
not only act as a catalyst for improving employment and self-employment
in Russia, but also serve as a means of diversification in many
mono-industry towns. According to VEB's 2009 annual report
'delivering [the] SME support agenda envisages a systemic
development of SMEs with due regard for the priorities of Russia's
socio-economic development' (VEB, 2010). Under an agreement
concluded with KfW Bankengruppe, leading priority leading will be
extended to businesses developing and introducing energy-efficient and
energy saving technologies. Notably though, increased state sponsored
credit availability to the SME sector can only partially make up for the
systemic lending practices referred to earlier and the general drop in
credit availability post crisis. Moreover, it raises question with
respect to the identification of investment and growth sectors if the
VEB's objective are to support political objectives over commercial
considerations.
CONCLUSION
This study is concerned with the interlink between resource
revenues and financial sector management in Russia and Kazakhstan. In
the absence of a well functioning private financial sector, the
governments of these two countries can substitute for the actions of
private actors by introducing dedicated financial vehicles that channel
and direct resource revenues from various sovereign wealth funds (SWFs).
Specifically, these instruments allow the governments of Russia and
Kazakhstan alternatives to direct ownership in their pursuit of national
economic priorities.
Special state investment vehicles--Samruk-Kazyna and
Vnesheconombank--were established that directly channelled resource from
the oil and gas revenues into domestic credit markets. This structural
use of resources from the oil funds for this purpose occurred prior to
the financial crisis, though in absolute terms the Russian investment
vehicle is small compared to Samruk-Kazyna. Notably, the oil funds
themselves have performed an essential system-preserving role during the
crisis. In this respect both funds have in fact conformed to theory--the
crisis as such provides a unique stress-test of the viability of
resource accumulation in oil funds. However, it is also evident that in
their system-preserving capacity the Funds have ensured the continuation
of systemic particularities in the post-crisis period that also imply
the continuation of structural weaknesses.
Post-crisis Russia is again recording strong balance of payments,
high fiscal reserves and low public debt, but also continued dependence
on commodity prices, lack of domestic investment funds and high levels
of NPLs. Post-crisis Kazakhstan has experienced strong export recovery,
the successful restructuring of BTA and Alliance's foreign debt as
well as foreign reserve growth. Pre-2009, oil funds' assets grew
rapidly, almost by accident, and there was lack of clarity (9) about
their objectives apart from general statements about their use for
stabilisation. (NRFK accumulated assets when the price of oil exceeded
$19 per barrel) or social goals (eg, Norwegian Wealth Fund was to fund
pension obligations), but in 2009 both were raided to fund economic
stimulus packages in the face of recession. In this episode, the funds
themselves were passive as Samruk-Kazyna and VEB assumed the role of
implementing agencies, and hence became far more important, justifying
our paper's focus on these financial vehicles.
The case illustrations can also be interpreted in a neoclassical
framework. Standard growth theory suggests that, in the absence of
market imperfections, investments will be directed to their highest
return. Our argument is that state-owned investment vehicles in this
sense constitute additional market imperfections in that they may direct
investment on the basis of non-economic considerations. In any given
economy some investments are carried out on the basis of non-economic
considerations such as equity, redistribution etc. With respect to the
overall economic trajectory, an important issue is, therefore, the size
of this investment vis-a-vis overall investment in the economy. In
Russia and Kazakhstan these shares differ--Samruk-Kazyna's
investment responsibility constitutes a much larger part of overall
investment than does VEB's.
At a more general level, the inflow of oil and gas revenue in
Kazakhstan and Russia has enabled economic nationalist structures via
financial market intervention. However, the rapid credit expansion in
recent years has not concomitantly led to a comparable expansion of
investments, an issue that is compounded by structural weaknesses in the
banking and credit system that, partially, necessitates the development
of the dedicated state-owned investment vehicles discussed in this
paper.
However, what distinguishes these instruments is the development of
incentives structures more akin to quasi-market mechanisms. The banking
system in Russia remains dominated by state banks whereas in Kazakhstan
Samruk-Kazyna has a large equity stakes in several large private sector
banks. Large private banks often remain related to specific industries
or financial industrial groups. Similarly, state controlled banks have
strategic objectives beyond, and sometimes before, return
considerations. Thus, as the state increases its de facto and de jure
property rights throughout the economy, it becomes pertinent that the
state also is able to identify the 'right' places to direct
resources if it is to ensure continued output expansion. It appears,
however, unlikely that these 'right' places will lead to a
significant real diversification of the economy or the development of a
broader SME sector. For this to occur the security of property rights
needs to be formally and informally strengthened. However, there may be
limited incentives to conduct such a structural change in the short
term.
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(1) For the role of the NOCs see Kalyuzhnova and Nygaard (2008).
(2) The use of these revenues is debated widely in the economic
literature (see Acemoglu and Johnson, 2005; Brunnschweiler and Bulte,
2009; Gylfason, 2000; Papyrakis and Gerlagh, 2004), but in this paper we
are more interested in the impact that resource nationalism is making on
the governmental strategies in the financial sector.
(3) $8.3 billion will come from the state budget and $10 billion
from the National Fund of the Republic of Kazakhstan (NFRK).
(4) For more details see the section 'Special vehicles as
crisis management tools' of this paper.
(5) Joint Stock Company Sovereign Wealth Fund
'Samruk-Kazyna' was founded in accordance with the Decree of
President of the Republic of Kazakhstan dated 13 October 2008 No. 669
'On some measures on competitiveness and sustainability of national
economy' and by the Decree of the Government of the Republic of
Kazakhstan dated 17 October 2008 No. 962 'On measures on
realization of the Decree of President of the Republic of Kazakhstan No.
669'.
(6) The key area for Samruk-Kazyna and companies shall be
modernisation and diversification of national economy in the framework
Annual Addresses of the President of Kazakhstan, Strategy of Industrial
and Innovation Development of Kazakhstan 2003-2015, '30 Corporate
Leaders of Kazakhstan' Program, aims and objectives assigned to
Companies and other documents.
(7) Vnesheconombank resulted out of a reorganisation of a number of
state-owned banks around the Vnesheconombank USSR in 2007; the latter
was merged with the Russian Development Bank and Roseximbank.
(8) Kalyuzhnova and Nygaard (2009) show that the overall share of
SME lending constituted only a small proportion of VEB's assets in
2007.
(9) Saving for future generations was compromised in 2009 when a
large share of NFRK liquid assets ($10billion out of <$30billion) was
used for short-run crisis management. This may have been a good use of
funds but it was not an obvious goal in official statements in
2000-2008.
YELENA KALYUZHNOVA & CHRISTIAN A NYGAARD
The Centre for Euro-Asian Studies, The University of Reading,
Whiteknights, PO Box 218, Reading, RG6 6AA, UK. E-mails:
y.katuyzhnova@rdg.ac.uk; c.a.b.nygaard@rdg.ac.uk
Table 1: Domestic credit in Russia and Kazakhstan 2003, 2007 and 2008
Domestic credit Domestic credit
to private sector to household
(%, GDP) (%, GDP)
2003 2007 2008 2003 2007 2008
Kazakhstan 21.9 58.9 48.8 2.6 17.4 12.6
Russian 21.0 37.9 41.0 1.9 9.0 9.6
Federation
FSU, average 17.7 40.3 44.3 4.1 16.0 16.2
Mortgage
Non-performing lending
loans (%) (%, GDP)
2003 2007 2008 2003 2007 2008
Kazakhstan 3.9 2.7 7.1 0.6 4.9 4.9
Russian 5.4 2.6 3.9 na 1.9 2.5
Federation
FSU, average 5.8 2.8 5.1 3.1 10.1 10.7
Asset share of
foreign owned
banks (%)
2003 2007 2008
Kazakhstan 56.9 38.5 12.9
Russian 7.4 17.2 18.7
Federation
FSU, average 47.1 50.9 51.1
Note: FSU is the un-weighted average of Armenia. Azerbaijan,
Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz Republic, Latvia,
Lithuania, Moldova and the Russian Federation.
Source: European Bank for Reconstruction and Development
Table 2: Oil and gas revenues in energy rich FSU countries
Kazakhstan
2000 2007 2008
0&G general government revenue, % GDP 6.4 9.4 12.4
Revenue as % of GDP 21.7 28.8 27.8
0&G as a share of revenue 29.5 32.6 44.6
Russia
2000 2007 2008
0&G general government revenue, % GDP 5.5 10.7 12.6
Revenue as % of GDP 37.1 40.0 38.4
0&G as a share of revenue 14.8 26.8 32.8
Source: IMF Article IV consultations for Azerbaijan, Kazakhstan
and Russia in 2003 and 2010
Table 3: Stabilisation programme of November 2008
Sector Amount, Description
$ billion
Financial 4 Samruk-Kazyna to buy shares and
subordinated debt from Kazakhstan's
largest banks. Stressed assets fund
to be set up.
Real-estate 3 Samruk-Kazyna to manage pension
funds loaned for priority investment
projects financing, purchase
apartments in Astana and Almaty and
make discount-rate mortgages
available to homeowners.
SMEs support 1 Samruk-Kazyna to provide funding
through banks, of which 70% will go
to existing projects and 30% to new
projects.
Agriculture 1 KazAgro Holding to finance 11
projects in the agriculture sector.
Infrastructure and 1
individual projects
Table 4: Ten largest banks in Russia, bank assets and
ownership type, 2008
Bank Percentage of Ownership
banking assets
Sberbank 23.7 State
VTB 8.0 State
Gazprombank 4.7 State
Rosselhozbank 2.9 State
Bank of Moscow 2.8 State
Alfa-Bank 2.5 Private domestic
UniCreditBank 2.1 Private foreign
Raiffeisenbank 2.1 Private foreign
VTB-24 2.0 State
Rosbank 1.7 Foreign
Source: OECD 2009
Table 5: Selected Russian state crisis measures until end 2008
Aim Amount ($) Source
Russian corporate 50 billion Central Bank of Russia
debt financing (CBR) reserves
Investment support 15 billion Federal budget
Capital boost for banks 35 billion CBR and (NWF)
Financial market support: 18 billion National Welfare Fund
stock and bonds (NWF)
buy-backs
Construction industry 5 billion Federal budget
support
Oil industry support 6 billion Federal budget
Liquidity support for (i) 83 billion CBR
banks (ii) Variable
Aim Delivery vehicle
Russian corporate Vnesheconombank
debt financing
Investment support Corporate profit tax reduced
to 20% (from 24%)
Capital boost for banks Direct infusion
Financial market support: Vnesheconombank
stock and bonds
buy-backs
Construction industry Construction and demolition
support of new (military and social)
and old housing
Oil industry support Reduced calculation period on
export duty calculations
Liquidity support for (i) Short-term deposits,
banks reduced reserve requirements,
unsecured lending
(ii) Daily repo operations
Source: www.businessneweurope.eu
Table 6: Banks with the state participation
Beginning 2009 Samruk-Kazyna Bank assets
(February) stake (million $)
Kazkommerts 0.25 18855
BTA 0.75 15910
Halyk 0.25 11790
Alliance * 0.76 6624
Total for the four large banks 53179
Other 33 banks 26305
Total for banking sector 79484
Beginning 2009 Bank equity Bank deposits P/B
(February) (million $) (million $)
Kazkommerts 2794 14023 0.65
BTA 1244 15257 0.37
Halyk 1137 10666 0.45
Alliance * 1049 4797 0.16
Total for the four large banks 6223 44743
Other 33 banks 3402 16395
Total for banking sector 9625 61138 0.76
Source: Samruk-Kazyna data
