18Section 6. Institutional change
6.1. The public sector and privatization policy1
6.1.1. Societies and organizations in federal ownership: quantitative dynamics
From 2016, statistical data began to be published in the framework of the System of Public Property Management Efficiency Estimates. It was approved by Decree of the RF Government No 72 dated January 29, 2015, and introduced by way of replacing the public sector monitoring data, collected and released by the Federal State Statistics Service (Rosstat) since the early 2000s in accordance with the provisions stipulated in RF Government Decree No 1 dated January 4, 1999 (as amended on December 30, 2002). Among other things, the System contains data on the number of federal state unitary enterprises (FSUEs) and joint-stock companies (JSCs) with RF stakes in their capital. Previously, such data were usually published as part of government privatization programs (from 2011 - for three-year period, and prior to 2011 - for one-year period). In the current Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019, relevant data are available only as of early 2016 (Table 1), and so in order to describe the processes taking place over the period 2016-2018, one must rely on data in the System of Public Property Management Efficiency Estimates2.
1This section was written by G. Malginov, Gaidar Institute, RANEPA; A. Radygin, Gaidar Institute, RANEPA.
2 This section estimates the movement pattern, in nominal terms, of societies and organizations in federal ownership for the corresponding years. For available estimates of the public sector's input in the national economy, see Abramov, A., Aksenov, I., Radygin, A., Chernova, M. Modern Approaches to Measuring the State Sector: Methodoology and Empirics // Economic Policy, 2018, V. 13, No 1 (February), pp. 3669; 2018, V. 13, No 2 (April), pp. 28-47; and for public sector indices, see https://ipei.ranepa.ru/laifr, https://ipei.ranepa.ru/kgu
Table 1
The societies and organizations in federal ownership, entered in the Federal Property Register and the System of Public Property Management Efficiency Estimates in 2010-2018
Date Economic societies with federal stakes, units Other holders of ow pro nership rights to registered federal perty entities, units
Stake (share) in capital special right to participate in company's management ('golden share') without holding any stakea FSUEs FTEs FSIs
As of January 1, 2010 3,066/2,950b 3,517b
As of January 1, 2013 2,356/2,337b 1,800/1,795b 72 20,458
As of January 1, 2016 1,557/1704b 88/64c 1,488/1,247b 48 16,194
As of April 7, 2016c 1,683/1,620d 1,236 48 16,726
As of July 1, 2016 1,571 82 1,378 47 16,990
As of January 1, 2017 1,356/1,416e 81 1,245/1,108e 48 16,846
As of July 1, 2017 1,247 1,058 53 16,244
As of January 1, 2018 1,189/1,130e 77 984/862e 50 15,985
As of July 1, 2018 1,060 77 868 50 15,520
As of December 1, 2018 1,068 60 1,016/705f 43 13,424
a - the special right is not entered in the Register as a separate registered item, however it is mentioned in various materials published by the RF Federal Agency for State Property Management (Rosimushchestvo) and in the context of data on state stakes in joint-stock capital; b - the number of JSCs and FSUEs as stated in the privatization programs for 2010-2013, 2014-2016, and 2017-2019 (in the latter, the data based on OKVED Codes (All-Russia Classifier of Economic Activities) refer to companies with shares (or stakes) in federal ownership); c - according to Rosimushchestvo's data for 2015;
d - the numerator is the total number of legal entities, including CJSCs and LLCs; the denominator is the number of stakes and shares; from data published in Rosimushchestvo's reports it follows that the difference between the two figures equals the number of JSCs with a 'golden share' without any stake). e - based on data published in the 2017 Report and 2018 Report on the implementation of the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019;
f - the denominator is the number of FSUEs entered in the Federal Property Register as of December 4, 2018, according to the report delivered by former head of Rosimushchestvo Dmitry Pristanskov at parliamentary hearings at the State Duma concerning amendments to legislation regulating the activities of unitary enterprises.
Source: Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2011-2013; Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2014-2016; www.economy.gov.ru, April 23, 2013; the RF Federal Agency for State Property Management (Rosimushchestvo)'s Annual Report for 2015; Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019; statistical data from the System of Public Property Management Efficiency Estimates, www.gks.ru, March 20,2016, September 5, 2016; March 20,2017, September 5, 2017; March 20, 2018, September 5, 2018; 2017 Report on the implementation of the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019; 2018 Report on the implementation of the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019; materials of Rosimushchestvo's meetings on issues of improving the approaches to federal property management (December 2018), www.rosim.ru, December 6, 2018.
As of July 1, 2018, the Russian Federation held stakes in 1,060 JSCs, was property owner of 868 FSUEs, 50 federal treasury enterprises (FTE), and 15,520 federal state institutions (FSI). If we compare these numbers with the corresponding data for the previous year, it can be noted that the total number of enterprises in each category demonstrated a decline: FSUEs - by 190 units (or 18 percent), JSCs with state stakes -by 187 units (or 15 percent), FSIs - by 724 units (or 4.5 percent). The number of FTEs shrank by 5.7 percent, but when viewed in absolute terms (3 units), this becomes incomparable with the rate of decline in the number of functioning economic entities with other organizational legal forms in federal ownership. The same is true with respect to JSCs with a special right to participate in company's management ('golden share') -their number shrank by 1.3 percent (or by 1 unit). Meanwhile, in H1 2018, the total number of FTEs and JSCs with a 'golden share' remained unchanged.
The movement patterns displayed by the entities belonging to the main organizational legal forms over that shorter period of time appeared to be as follows. The number of unitary enterprises lost 11.8 percent, that of economic societies - 10.8 percent, and that of state institutions - 2.9 percent. It is also noteworthy that by early 2018, the number of FSUEs (operated by right of economic jurisdiction) for the first time dropped below 1,000 units, and by mid-2018, the same threshold was passed by the total number of unitary enterprises owned at the federal level, including treasury enterprises.
According to data published by Rosimushchestvo, over several months of 2018, the number of economic societies with federal stakes shrank by 4.5 percent, while that of FSUEs increased by nearly 18 percent. The estimated changes in the number of FTEs (by 14 percent) and FSIs (by 16 percent) are not quite exact, because the data applied in the comparison were taken from different sources as of year-end (Rosimushchestvo) and beginning of year (Rosstat).
Some important information concerning the operation of economic societies with state participation could be derived from the year-end reports on the management of federal stakes in OJSCs and the use of the Russian Federation's special right to participate in an OJSC 's management ('golden share').
According to data provided by the Federal State Information System FGIAS ESUGI (Register of Assets Held by the Russian Federation) as of August 1, 2018, the Federal Property Register contained information on 1,134 JSCs with federal stakes, including 77 JSCs where the State held the special right to participate in a company's management granted by 'golden share1.
However, among these 1,134 companies, Rosimushchestvo could fully exercise its shareholder rights only in a total of 443 JSCs (or 39.1 percent of all JSCs vs. 40.8 percent in summer 2017; and vs. 52.1 percent in summer 2012), that is, last year's changes were in line with the steady downward trend (from 2014 onwards) in the relative share of
1 Summary statement based on the Year-end 2017 Report on the Management of Federal Stakes in OJSCs and the Use of the Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share').
those companies where Rosimushchestvo was not restricted in exercising its shareholder rights1.
The composition of the remaining group of entities (691 organizations) was as follows:
- economic societies with state stakes amounting to less than 2 percent of their charter capital, where, in accordance with Item 1 of Article 53 of Federal Law No 208-FZ dated December 26, 1995, 'On Joint-stock Companies', no proposals put forth by shareholders can be entered on the agenda of a general shareholder meeting) (296 units, or 26.1 percent of all JSCs);
- economic societies where the ownership rights to state stakes are delegated to other federal bodies of executive authority (FBEAs) and state corporations (for example, the RF Ministry of Defense, State Corporation Rostec, Rosatom, or JSCs operated under a trust management agreement) (266 JSCs, or 23.4 percent of all JSCs)2;
- economic societies undergoing bankruptcy procedures (in the phase of a bankruptcy proceeding) (104 JSCs, or 9.2 percent of all JSCs);
- economic societies undergoing a liquidation procedure (16 JSCs, or 1.4 percent of all JSCs);
- economic societies currently with no stakes de facto in the ownership by the Russian Federation (for example, if an entity has been privatized, or transferred as a contribution to the charter capital of a vertically integrated structure (hereinafter - VIS), or is undergoing the procedure of transfer into federal ownership) (9 JSCs, or 0.8 percent of all JSCs).
Table 2 shows how, in recent years, the relative shares of JSCs where Rosimushchestvo is restricted in its shareholder rights have been changing, with the reasons for such restrictions.
:The absence of restrictions on Rosimushchestvo's ability to exercise its shareholder rights does not mean that the Agency indeed has nothing to do with the management of relevant companies run by sectoral FBEAs, the latter getting involved in that process on the basis of general principles and depending on the actual distribution of powers, as determined in the Provision on the Management of Federal Stakes in OJSC and the Use of the Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share') (approved by Decree of the RF Government dated December 3, 2004, No 738).
2 It does not seem to be quite correct to place in one and the same group those JSCs where the ownership rights to state stakes are delegated to federal bodies of executive authority (FBEAs) other than Rosimushchestvo, state corporations, and companies operated under a trust management agreement, because one of the basic features of a state corporation (SC) as a legal entity (defined by RF legislation as a non-profit organization) is the right of ownership to its property, and, generally speaking, that right should also be exercised with regard to those state stakes that have been transferred to other entities as property contributions to their charter capital.
Table 2
The movement and structure, in 2012-2018, of the group of joint-stock companies with federal stakes in regard to which Rosimushchestvo is restricted in exercising its shareholder rights, based on reasons
for such restrictions
Total State stake is less than 2 percent" Shareholder rights transferred to other subjectsc Proceeding in bankruptcy Liquidation procedure No stakes owned by RF
units percent of all JSCs units percent of all JSCs units percent of all JSCs units percent of all JSCs units percent of all JSCs units percent of all JSCs
As of August 1, 2012
1258 47.9 434 16.5 387 14.75 156 5.95 55 2.1 226 8.6
As of August 1, 2013
988 42.3 465/134b 19.95 316 13.55 145 6.2 59 2.5 3 0.1
As of July 7, 2014
949 45.3 436/78b 20.8 302 14.4 146 7.0 57 2.7 8 0.4
As of August 1, 2015
884 47.4 373/75b 20.0 291 15.6 151 8.1 60d 3.2 9 0.5
As of August 1, 2016
858 53.85 349/61b 21.9 297 18.65 150 9.4 48d 3.0 14 0.9
As of August 1, 2017
769 59.25 276/60b 21.25 306 23.6 135 10.4 36d 2.8 16 1.2
As of August 1, 2018
691 60.9 296/49b 26.1 266 23.4 104 9.2 16 1.4 9 0.8
a - in accordance with Item 1 of Article 53 of Federal Law No 208-FZ dated December 26, 1995 'On Joint-stock Companies', no proposals put forth by shareholders can be entered on the agenda of a general shareholder meeting;
b - the denominator is the number of JSCs where the Russian Federation simultaneously exercises the special right to participate in their management ('golden share');
c - operated by other bodies of executive authority, by state corporations, or by other companies under a trust management agreement;
d - including JSCs undergoing a reorganization procedure;
e - JSCs with state stakes that are de facto no longer registered as federal property (previously privatized, transferred to the charter capital of a vertically integrated structure, their issues of shares have not been registered, or they no longer operate due to their liquidation or reorganization), but the entry of information thereof in the Register has not yet been properly formalized.
Source: Rosimushchestvo''s Year-end Reports on the Management of Federal Stakes in OJSC and the Use ofthe Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share') for 2011-2017; own calculations.
First of all, it should be noted that the number of JSCs, with regard to which Rosimushchestvo could exercise only a limited shareholder right, declined in absolute terms relative to 2017 by more than 10 percent (or by nearly 80 units), which is compatible with the annual decline rate over the previous period.
The main factor behind this trend was the shrinkage by 13 percent (by 40 units) of the group of JSCs where the shareholder rights had been transferred to other subjects, that group topping the list a year earlier. An even deeper plunge (by 23 percent) was demonstrated by the number of JSCs undergoing a proceeding in bankruptcy or a liquidation procedure (by more than 55 percent). However, when taken in absolute terms, the shrinkage of these two groups (by 31 and 20 units respectively), similarly to the movement pattern displayed by the group of JSCs where no stakes were de facto
owned by the RF (by 7 units), was less pronounced than in the first group. Meanwhile, the number of JSCs where state stakes amounted to less than 2 percent increased by more than 7 percent, and so they once again became the most numerous group in the category of JSCs where Rosimushchestvo exercises only a limited shareholder right. This particular movement pattern has determined the increasing relative share of all JSCs with minority state stakes (up to 25 percent) in the overall structure of JSCs with state stakes. However, certain role has also been played by those priorities that governed the privatization process of those JSCs with respect to which Rosimushchestvo is not restricted in exercising its shareholder rights (Table 3).
Table 3
The movement patterns of the number and structure of JSCs relative to the size of state stakes in their capital and their inclusion in the forecast plans of federal property privatization for 2012-2018
Date Economic societies (JSCs and LLCs) where RF is shareholder (or participant)
total, units share, percent of these, with RF stake in charter capital amounting to
100 percent 50-100 percent 25-50 percent 2-25 percent
units percent units percent units percent units percent
1 2 3 4 5 6 7 8 9 10 11
As of August 1, 2012
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 1,371/2629** 100.0 886 64.6 76 5.55 211 15.4 198 14.45
As of August 1, 2013
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 1,345/2333** 100.0 874 65.0 83 6.15 185 13.75 203 15.1
- JSCs included in forecast plans of federal property privatization *** 975 100.0 716 73.4 41 4.2 116 11.9 102 10.5
As of July 7, 2014
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 1147/2096** 100.0 709 61.8 66 5.8 171 14.9 201 17.5
- JSCs included in forecast plans of federal property privatization *** 842 100.0 596 70.8 36 4.3 113 13.4 97 11.5
As of August 1, 2015
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 980/1864** 100.0 589 60.1 55 5.6 142 14.5 194 19.8
- JSCs included in forecast plans of federal property privatization *** 668 100.0 469 70.2 18 2.7 90 13.5 91 13.6
As of August 1, 2016
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 735/1593** 100.0 469 63.8 48 6.5 91 12.4 127 17.3
- JSCs included in forecast plans of federal property privatization *** 478 100.0 336 70.3 14 2.9 56 11.7 72 15.1
As of August 1, 2017
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 529/1298** 100.0 325 61.4 38 7.2 76 14.4 90 17.0
- JSCs included in forecast plans of federal property privatization *** 278 100.0 176 63.3 11 4.0 51 18.3 40 14.4
Cont'd
1 |2|3|4|5|6|7|8|9|10|11
As of August 1, 2018
- JSCs in regard to which Rosimushchestvo is not restricted in exercising shareholder rights * 443/1134** 100.0 291 65.7 25 5.65 56 12.65 71 16.0
- JSCs included in forecast plans of federal property privatization *** 232 100.0 154 66.4 9 3.9 35 15.1 34 14.6
* - less the following entities: (1) JSCs with state stakes less than 2 percent, (2) JSCs where the shareholder rights on behalf of the RF are exercised by other subjects (other bodies of executive authority, state corporations, or subjects appointed under trust management agreements); (3) JSCs undergoing bankruptcy procedures (in the phase of a bankruptcy proceeding); (4) JSCs undergoing a liquidation procedure, (5) JSCs with state stakes that are de facto not registered as federal property (previously privatized or transferred to the charter capital of a vertically integrated structure); ** - the denominator is the total number of JSCs, as entered in the Federal Property Register; *** - only of those where Rosimushchestvo is not restricted in exercising its shareholder rights. Source: Rosimushchestvo's Year-end Reports on the Management of Federal Stakes in OJSC and the Use of the Russian Federation's Special Right to Participate in an OJSC 's Management ('Golden Share') for 2011-2017; own calculations.
The relative shares of federal stakes of different size included in the privatization program remained basically the same as in 2015-2017 (Table 4)
Table 4
The percentage of JSCs included in the forecast plans of federal property privatization, relative to the total number of economic societies in regard to which Rosimushchestvo is not restricted in exercising its shareholder rights, by their state stake size, in 2012-2018, percent
Date Full ownership (10 percent) Controlling stake (50100 percent) Blocking stake (25-50 percent) Minority stake (2-25 percent)
As of August 1, 2013 81.9 49.4 62.7 50.2
As of July 7, 2014 84.1 54.5 66.1 48.3
As of August 1, 2015 79.6 32.7 63.4 46.9
As of August 1, 2016 71.6 29.2 61.5 56.7
As of August 1, 2017 54.2 28.9 67.1 44.4
As of August 1, 2018 52.9 36.0 62.5 47.9
Source: Rosimushchestvo's Year-end Reports on the Management of Federal Stakes in OJSC and the Use ofthe Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share') for 2012-2017; own calculations.
The percentage of companies with minority state stakes included in the privatization program (approximately 48 percent), while having somewhat increased relative to 2017, nevertheless remained lower than the corresponding index for companies with 100-percent state stakes (approximately 53 percent) and blocking state stakes (61.5 percent). The percentage of the latter shrank, while that of companies with controlling state stakes increased (36 percent).
The logical outcome of these changes was the prevalence in the structure of economic societies with state stakes, by late 2018 (Table 5), of those with minority state stakes (less than 25 percent of charter capital). They accounted for 47.2 percent of the total number (504 units), while the relative share of JSCs in full state ownership (100 percent of charter capital) for the first time on many years declined (418 units, or 39.1 percent
of all JSCs). The relative share of blocking stakes (25 to 50 percent of charter capital) amounted to 8.25 percent (88 units), and that of majority stakes (50 to 100 of charter capital) - to only 5.45 percent (58 units).
Table 5
The movement and structure of the group of economic societies with state stakes in their capital (less those JSCs where the state holds the special right granted by 'golden share' without holding any stake)
in 2010-2018
Date Economic societies (JSCs and LLCs) where RF Is shareholder (or participant)
total, units share, percent of these, with RF stake in charter capital amounting to
100 percent 50-100 percent 25-50 percent less than 25 percent
units percent units percent units percent units percent
As of January 1, 2010 2,950 100.0 1,757 59.6 138 4.7 358 12.1 697 23.6
As of January 1, 2011 2,957 100.0 1,840 62.2 136 4.6 336 11.4 645 21.8
As of January 1, 2012 2,822 100.0 1,619 57.4 112 4.0 272 9.6 819 29.0
As of January 1, 2013 2,356 100.0 1,257 53.35 106 4.5 228 9.7 765 32.45
As of January 1, 2014 2,113 100.0 1,000 47.3 95 4.5 224 10.6 794 37.6
As of January 1, 2015 1,928 100.0 861 44.7 90 4.7 203 10.5 774 40.1
As of December 31, 2015 1,704 100.0 765 44.9 93 5.45 172 10.1 674 39.55
As of December 1, 2018 1,068 100.0 418 39.1 58 5.45 88 8.25 504 47.2
Source: Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2011-2013; Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2014-2016; Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019; Rosimushchestvo's Annual Reports for 2010-2015, materials of Rosimushchestvo's meetings on issues of improving the approaches to federal property management (December 2018).
The main trend that could be observed in the group of JSCs with state stakes after the switchover, in 2010, to 3-year privatization programs was the notable shrinkage in the relative share of those companies where the state could strongly influence managerial decisions due to participation in the charter capital. So, as of the end of year 2018, the state could exercise corporate control (equal to full ownership or majority stake) over less than 45 percent of all JSCs vs. more than 2/3 by early 2011, about 52 percent by early 2014, and slightly more than 50 percent by early 2016.
If we take a look at the data yielded by the System of Public Property Management Efficiency Estimates that encompass other levels, and not only the federal level, the following picture will emerge (Table 6).
According to data collected within the framework of the new system, by mid-2018 the total number of economic subjects belonging to the public ownership category amounted to approximately 60,400 units, which is less by approximately 2,300 units (or by 3.6 percent) than a year earlier, and by approximately 3,200 units less than the corresponding index for mid-20141.
1 The last bulletin of the developments in the public sector of the RF economy covered the period January-September 2014. Here, for the purpose of a medium-term analysis, the data for H1 2014, released as of 1 July 2014, were applied.
Table 6
The number of organizations operating in the public sector of the economy on the records of Rosimushchestvo, its territorial branches, and the bodies responsible for the management of public property held by RF subjects in 2013-2014, and the number of economic subjects fully or partially in public ownership in 2016-2018 (as entered in State registration records), by their organizational legal form
Date Total FSUEs, including treasury enterprises State institutions Economic societies with shares (or stakes) amounting to more than 50 percent of charter capital owned by
state economic societies operating in public sector
As of January 1, 2013 67003a 4,891 56,247 3,501 2,364
As of July 1, 2013 66,131a 4,589 56,100 3,201 2,241
As of January 1, 2014 64,616a 4,408 54,699 3,097 2,412
As of July 1, 2014 63,635a 4,236 54,173 2,988 2,238
As of January 1, 2016 65,587b 4,284 56,693/56,649c 3,888d
As of July 1, 2016 65,218b 3,982 56,893/56,856c 3,718d
As of January 1, 2017 64,457b 3,719 56,548/56,507c 3,532d
As of July 1, 2017 62,655b 3,294 55,414/55,361c 3,353d
As of January 1, 2018 61,734b 3,053 54,851/54,814c 3,239d
As of July 1, 2018 60,391b 2,763 53,933/53,899c 3,125d
a - including those organizations whose charter documents, after their State registration, do not specify property types, but less those joint-stock companies where more than of 50 percent shares (or stake) are in joint RF and foreign ownership;
b - including economic subjects with an organizational legal form other than unitary enterprise, state institution, or joint-stock company (production and consumer cooperatives, associations (unions), housing cooperatives, foundations, public companies, etc.);
c - total number of institutions created by the RF and RF subjects (less state academies of sciences and private institutions, which are listed as institutions in the new System, but must not be taken in account here); d - total number of economic societies, the size of their state stake (or share) being irrelevant; data concerning the number of economic societies with controlling state stakes are available only for JSCs with federal stakes. Source: On the Development of the Public Sector of the Economy of the Russian Federation in 2012 (pp. 7-11), in H1 2013 (pp. 7-11), in 2013 (pp. 7-11), in H1 2014 (pp. 7-11), M., Rosstat, 2013-2014; Statistical information on public property management efficiency estimates, www.gks.ru, March 20, 2016, September 5, 2016, March 20, 2017, September 5, 2017, March 20, 2018, September 5, 2018.
For comparable categories of economic subjects it can be noted that, relative to mid-2017, the number of unitary enterprises declined by approximately 530 units (or more than 16 percent), that of JSCs - by nearly 230 units (or 6.8 percent), and that of state institutions - by approximately 1,500 units (or 2.6 percent). At the same time, by mid-2018 the number of state institutions had become somewhat less than 4 years earlier.
As far as the changes that occurred within a shorter period of time are concerned, over H1 2018 the number of state institutions shrank by 1.7 percent, that of JSCs - by 3.5 percent, and that of unitary enterprises - by 9.5 percent. However, it should be noted with respect to the latter that, according to data released by Rosimushchestvo, the total number of state unitary enterprises, including FSUEs and enterprises owned by RF subjects, exceeded 2,900 units - that is, it shrank over the course of the year 2018 quite moderately (approximately by 4 percent). Their relative share in the total number of
unitary enterprises (about 18,500 units) is small, whereas municipal enterprises prevail (more than 15,000 units)1.
All these facts notwithstanding, it should be borne in mind that a decline in the number of state-owned entities occurred in the main as a result of their reorganization by way of merger, and not privatization, the progress of the latter being rather slow.
6.1.2. Privatization policy
2018 was the second year of the implementation of the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019, approved by Directive of the RF Government No 227-r dated February 8, 2017. This was the third 3-year privatization program developed with a view towards a longer planning period established for a forecast plan (or program) of federal property privatization (extended from one to three years) on the basis of the alterations introduced into prevailing legislation on privatization in spring 2010.
As was the case with the previous privatization program, numerous adjustments and alterations were later introduced into the new document. Since the moment of approval of the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019, a total of 44 normative legal acts (NLA) pertaining to these issues were adopted, and the frequency of legislation adjustments (the introduction of 29 new NLAs) over the course of last year was almost twice as high as in 2017 (a total of 15 NLAs).
The current privatization program envisages the possibility of privatization of 7 biggest companies by special presidential and governmental decisions, with due regard for the market situation and recommendations of eminent investment consultants. In the framework of preparation for the alienation of shares in VTB Bank (PJSC) and Sovkomflot PJSC by the agents specifically commissioned in 2016 for handling their sale (Renaissance Broker LLC and VTB Capital respectively), proposals are being elaborated as to which methods should be applied in closing the deals. The RF Government did not make any proper decision by the year-end 20 1 82.
According to data from the current report on federal budget execution as of January 1, 2019 (internal sources of deficit financing) available on the RF Federal Treasury's official website, the amount of revenue generated by the sale of shares and other forms of participation in capital held in federal ownership was RUB 12,787.5 million, which is more than twice above the budget revenue target set in the privatization program (RUB 5.6 billion per annum to be generated by privatization deals alone, less the value of shares in biggest companies).
More than half (80 percent) of that sum (RUB 10,330.8 million) was generated in the course of implementing RF Government Directives No 1430-r dated September 2, 2010
1 www.rosim.ru, December 6, 2018.
2 See also Radygin, A.D., Entov, R.M., Abramov, A.E., Aksenov, I.V., Malginov, G.N., Chernova, M.I. Large-scale reluctant privatization: contradictions and challenges under sanctions // Voprosy Ekonomiki, 2018, No 8, p. 5-38 (In Russian).
and No 1172-r dated June 9, 2016, and also in accordance with the terms stipulated in the supplementary agreement of June 23, 2016 attached to the 5-year installment buyout agreement, of October 9, 2010, between Rosimushchestvo and SSA Sistema PJSC concerning 547,312,918 shares in Sistema Shyam Teleservices Limited (now Sistema Smart Technologies Limited)1. owned by the Russian Federation, to the total value of USD 777 million. That deal was the only one that fell outside of the established privatization procedures. The revenue generated for the federal budget (more than RUB 10.3 billion) amounted to 1/5, and if we add the sum in excess of RUB 8.5 billion received as part of the same deal a year earlier, to about 38 percent of the total value of USD 777 million recalculated in rubles at the exchange rate as of late June 2016.
In 2018, beside that deal, another 46 stakes in JSCs were sold, and the decisions concerning the terms of their privatization were finalized with respect of 21 federal state unitary enterprises (FSUE). The number of sold stakes (or shares in charter capital) stayed at the same level as in 2016 (47 units), although at that time, more than 3/4 of sold stakes (36 units) were those put up for sale in the course of the previous year (2016). Nevertheless, the number of sold stakes in 2018 amounted to only a half of the corresponding index for the 'crisis' year 2015 (103 units), which was also the second year of the implementation of the privatization program. Meanwhile, the total value of the deals (RUB 2.86 billion)2 lost 45 percent relative to 2017, and so moved far away from the initially established federal budget revenue target (less biggest deals) set in the privatization program (RUB 5.6 billion)3. The number of privatized FSUEs (18 units) somewhat increased, while plunging below the corresponding index for 2013 (26 units) (TTable 7).
Table 7
Comparative data on the movement of the number of privatization deals involving federal state unitary enterprises and federal stakes
in 2008-2017
period Number of privatized enterprises (entities) formerly in federal ownership (data released by Rosimushchestvo)
privatized FSUEsa, units sold stakes in JSCs, units sold treasury property entities, units
1 2 3 4
2008 213 209b
2009 316+256c 52b
2010 62 134b
2008-2010 591+256 395b d
2011 143 317e/359b 3
2012 47f 265e 40
2013 26 148e 22
:The stake in that joint Russia-India venture was received by the Russian Federation under the 2007 Intergovernmental Agreement by way of redemption of debt against previously issued loans.
2 At the same time, in Rosimushchestvo's 2018 Report on the Implementation of the Privatization Program it is stated that the total federal budget revenue from that source amounted to RUB 2.44 billion, including the deals closed in 2017.
3 The budget target for proceeds of sale of shares were not met with respect to the revenues generated by the deal with SSA Sistema PJSC.
Cont'd
1 2 3 4
2011-2013 216 730e 65
2014 33 107e 12
2015 35g 103e 38
2016 60g 179e 282
2014-2016 125g 389° 332
2017 18 47b 77b
2018 21 46 174
a - all preparatory work is completed, and the relevant decisions concerning the terms of privatization are issued;
b - including those stakes (and for 2017 - also treasury property entities) that were put up for sale in the previous year;
c - the number of FSUEs in respect of which the decisions concerning their reorganization into JSCs were made by the RF Ministry of Defense, in addition to those cases where a similar decision was made
by Rosimushchestvo;
d - according to available information concerning sales of other property entities over that period, 4 immovable military property entities were sold between October 2008 through January 2009; and there were decisions, in late 2010, concerning some other property entities to be put up for sale and the terms of their privatization, the deals being actually closed in 2011; e - less sales of shares with the participation of investment consultants;
f - estimated value based on data on the total number of FSUEs in respect of which directives concerning the terms of their privatization in the form of reorganization into OJSCs (216 units) were issued, taken from Rosimushchestvo's Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2011-2013, and the year-end results of 2011 and 2013; g - for several enterprises, the decisions concerning the terms of their privatization were abolished in 2015-2016 and then readopted, so the number of FSUEs with regard to which privatization decisions were made individually over the three-year period is somewhat higher than in the tabulated period-end data for 2014-2016 (125 units).
Source: Rosimushchestvo's annual report for 2008; Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2009, Moscow, 2010; Report of the RF Ministry of Economic Development on the Results of Federal Property Privatization in 2010; Report of The RF Ministry of Economic Development on the Results of Federal Property Privatization in 2011; Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2011-2013; 2014 Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2014-2016, www.rosim.ru, February 19, 2015; 2015 Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2014-2016, www.rosim.ru, February 8, 2016; 2016 Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 20142016; 2017 Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2017-2019; 2018 Report on the Implementation of the Forecast Plan (Program) of Federal Property Privatization in 2017-2019.
The biggest transaction was the sale of all shares in Stroytrans No 1 JSC (Tyumen) for RUB 432.3 million. The other four out of the five major deals closed that year were the sales of 100-percent stakes in four 4 JSCs situated in the city of Moscow (Avtobaza MSKh JSC ('RF Ministry of Agriculture's Vehicle Depot'), Standard OJSC (industrial-transport company), and two R&D organizations). Three of these 5 entities were sold through Auction House of the Russian Federation (RAD OJSC), and the other two -through VTB Capital and Rosimushchestvo. One of these deals was a rare example of a notable surge of the selling price above the offer price: there were 4 bidders for the
federal stake in Avtobaza MSKh JSC, and after seven bids the price gained 35 percent, rising to RUB 401.6 million1.
However, the results of privatization that followed standard procedures were achieved through the efforts of RAD OJSC, the latter selling 28 stakes (out of the 139 stakes earmarked for sale) to the total value of RUB 2.053 billion (71.8 percent of total proceeds). While the actual number of sold stakes increased relative to 2017 (28 units vs. 17 units), the deal value shrank more than by half. The input of the other agent -VEB Capital Plc, which had been commissioned to handle the sales of 95 economic societies, was an order of magnitude less. It sold only 2 stakes to the total value of approximately RUB 211 million (in 2017, there were no sales). It is expected that the final results of bidding and of the closure of sales of stakes in 26 JSCs will become available in Q1 2019, including the stakes in 22 JSCs handled by RAD OJSC.
In 2018, in contrast to sold stakes (or shares) in economic societies, the sales of treasury property entities demonstrated a positive movement pattern. There were more than 1,300 bids by potential investors, which is more than 2.5 times above the corresponding index for 2017. The number of sold treasury property entities (174 units) increased nearly 2.3 times relative to 2017 (77 units), although it was still below the record high achieved in 2016 (282 units). Nevertheless, for three straight years this index was stably above that of sold stakes (or shares) in economic societies, and last year the difference between the two indices was 3.8 times. The total value of closed deals increased nearly 1.6 times (to RUB 446.5 million).
Such positive shifts could largely be achieved thanks to a more active involvement of independent sellers commissioned to handle the sale of treasury property entities. In accordance with the RF Government Directives, in addition to the already mentioned RAD OJSC (commissioned to sell 285 property entities, of which 39 units were actually sold to the total value of RUB 72.1 million), the sales were also handled by the Agency for Direct Investments (ADI) (commissioned to sell 73 property entities, to date it sold 20 units to the total value of RUB 70.6 million) and VEB Capital Plc. (commissioned to sell 73 property entities, and actually sold 14 units to the total value of RUB 30.8 million). Overall, these agents accomplished the sales of approximately 42 percent of all property entities earmarked for bidding, and generated 39 percent of total proceeds, while in 2017 all the sales were handled by RAD OJSC alone (9 units to the total value of RUB 28.60 million, that is, about 10 percent of total proceeds). It is expected that the final results of the sales of 84 property entities will become available in Q1 2019, including the 34 property entities handled by RAD OJSC and the ADI.
In 2018, in the framework of implementation of 23 Presidential Executive Orders and 10 decisions of the RF Government concerning the creation or expansion of vertically integrated structures (VISs), Rosimushchestvo set out to establish or expand 12 VISs. The 3-year privatization program launched in that sector listed a total of 38 FSUEs, shares in 62 JSCs, and 132 treasury property entities. In 2018, the relevant decisions
1 www.rosim.ru, August 27, 2018.
concerning the terms of privatization were taken with regard to 8 FSUEs, 4 JSCs, and 41 treasury property entities.
In spite of the complete switchover to an electronic property sales mechanism and substantial non-stop IT services, the progress in the privatization process has been rather slow due to the constraints of declining investment demand coupled with frequent periods of instability in the stock market. As in the previous years, the group of federal property entities earmarked for privatization included many economic societies with low financial and economic performance indices, as well as some companies undergoing bankruptcy procedures. Thus, more than 54 percent of all announced auctions of stakes (or shares) in economic societies, and 56 percent of biddings for treasury property entities, were canceled due to the absence of any bids.
The factor that determines the lack of interest on the part of potential investors in the initial bidding for properties earmarked for privatization is the opportunity to buy those same properties through public offer at half the initial price, after the auctions had been canceled. The hopes that an increasing number of participants in bidding will translate in a more intense competition and higher prices of the property entities put up for sale have proved to be futile.
In such a situation it was only logical for the government to more closely involve independent sellers in the sales of property entities earmarked for privatization, and to rely on their higher marketing competence.
The comprehensive preparatory measures implemented by independent sellers prior to property sales make it possible to attract a large number of investors operating in a given sector, ensure a proper competition level, and achieve a higher selling price. However, the actual results of sale deals closed by independent sellers are by no means always indicative of their better performance. Thus, the success rate of sales of stakes (or shares), measured as the ratio of the number of sold stakes (or shares) to the number of biddings, were approximately the same for Rosimushchestvo and for the independent agents (38-39 percent). In the course of sales of treasury property entities by VEB Capital Plc., the number of canceled biddings was 1.5 times higher than the number of closed sale deals.
Besides, as the RF Government Directives whereby a large quantity of assets was to be transferred to independent sellers were issued only as late as Q1 2018, they launched their pre-sale preparatory measures with respect to an overwhelming majority of those assets in Q2 2018, after all the agent agreements and supplementary provisions thereto had been properly formalized.
The Federal Law on the Federal Budget for 2019-2021 No 459-FZ dated November 29, 2018, similarly to last year's budget law, offers no specific information on the amount of revenues to be generated by privatization neither in the body text, not in the annexes thereto.
At the same time, in the explanatory note attached to the draft law submitted by the government the revenues from privatization of assets in federal ownership were listed alongside government borrowings as a separate source of federal budget deficit
financing. Similarly to the draft budget law for the past year 2018, some of the supplementary materials attached to the draft law did provide data pertaining to the forecast plan (program) of federal property privatization, with a substantiated forecast of federal budget revenue to be generated by privatization; this information can also be found in the explanatory note and the calculated by-function targets for each source of federal budget deficit financing.
The amount of federal budget revenue to be generated by federal property privatization is forecast to be RUB 13.0 billion in 2019 and RUB 10.9 billion in 2020, with no projections for 2021. Its role as a source of federal budget deficit financing will be brought to a minimum: in 2019-2020, the expected privatization-generated revenue is to be less than 1 percent of total planned government borrowing. Compared with the amount of planned proceeds of federal property sales (less the proceeds of biggest deals) stated in the materials attached to the draft law on the federal budget for 2018 and planning period
2019-2020 and submitted last autumn by the RF Government (RUB 12.2 billion in 2019 and RUB 11.4 billion in 2020), the target set for 2019 appears to be somewhat higher, and that for 2020 - somewhat lower.
Judging by the results achieved in 2018 in the course of implementing the current privatization plan, the probability of achieving the planned target for privatization-generated revenue is quite high. The amount of proceeds from the sale of shares in federal ownership and other forms of participation in capital (RUB 12.8 billion) in the Report on Federal Budget Execution is either comparable with the corresponding targets for 20192020, or exceeds these targets.
The substantiation for the amount of federal budget revenue to be generated by privatization can be found in the Forecast Plan (Program) of Federal Property Privatization and the Main Directions of Federal Property Privatization for 2017-2019 adopted in early 2017 by Directive of the RF Government No 227-r, where 7 biggest companies are earmarked to be privatized in the framework of individual schemes. However, as the RF Government has adopted no new decisions concerning the alienation of federal stakes in biggest companies over the period 2019-2021, no targets are set for the proceeds from the sales of such stakes in 2019 and the planning period
2020-2021.
Nevertheless, there do exist certain preconditions for the closure of two deals.
The plans for 2019 include the completion of preparatory measures for the sale of federal stake in Kristall Production Association JSC to Alrosa PJSC in order to properly maintain the existing gems cutting and polishing complex of the Russian Federation, create appropriate conditions for the development of diamond-cutting enterprises and attract investments that can be spent on their modernization and upgrading. After Kristall Production Association JSC had been struck off the list of strategic enterprises and joint-stock companies, the RF Government was assigned the task of ensuring proper control over its financial and economic situation until the 100 percent federal stake was to be completely alienated.
Besides, acting outside the framework of the current privatization program, the private shareholders in Vnukovo International Airport JSC filed a request with Rosimushchestvo by way of exercising their right stipulated in the corporate shareholder agreement signed in 2016, whereby the State was obliged to sell all the remaining shares in federal ownership at any moment within 5 years from the date of their consolidation. The closure of the privatization deal with respect to the blocking stake that is still in federal ownership (25.0525 percent) is also expected to take place in 2019.
Another point on the future privatization agenda has to do with amendments that need to be made to the 2008 law 'On the Specific Features of Alienation of Immovable Property in State or Municipal Ownership and Leased by Subjects of Small and Medium-Sized Entrepreneurship, and the Introduction of Alterations into Some Legislative Acts of the Russian Federation' (No 159-FZ) with regard to the realization, by small and medium-sized enterprises (hereinafter - MSE), of their preferential right to buy out the properties leased by them. This right consists in purchasing a property entity at a price equal to its market value and determined by an independent valuer in the procedure established by the 1998 law on valuation activity under an installment buyout plan for a period of not less than 5 years, in conformity with the norms and constraints established for MSEs.
It should be reminded that this law, adopted more than 10 years ago, granted this right with respect to leased property entities owned by RF subjects and municipalities. After the introduction of alterations in summer 2018 (by Law No 185-FZ), that norms now also apply to property entities in federal ownership, and the function of enforcing the law is assigned to Rosimushchestvo.
The law can now be applied over an unlimited period of time1, and presently the starting point for launching an action and applying the relevant norms is the day on which an MSE files a request of realization of its preferential right to buy out the property entity leased by it. In the event of a loss of such right upon a refusal to conclude a purchase-and-sale agreement and a failure to sign it within 30 days from the date of receiving the proposal thereof and (or) the purchase-and-sale agreement2, a MSE has been granted the right to file a request with an empowered agency, on condition that as of the date of filing such a request, the leased property entity with respect to which that MSE has previously lost the preferential right for its purchase is being held by the said MSE by right of temporary ownership and (or) temporary use under a lease agreement (or agreements).
In accordance with the 2007 Federal Law 'On Developing Small and Medium Scale Entrepreneurship in the Russian Federation', (No 209-FZ in its current version), public authorities of all levels should draw up lists of state and municipal property entities unencumbered by any rights of third parties (with the exception of the right of economic
1 Previously, the rights granted by the law were effective during a certain period of time, and then could be extended over a next period (from July 1, 2010 to July 1, 2018).
2That period is suspended, if a dispute is initiated with respect to the market-based valuation of the property entity on which its buyout price is based, until the date of entry into force of a court ruling.
jurisdiction, operative management right, or ownership rights of MSE), and revise these lists every year before November 1. These lists should be made public through the mass media and be posted to the official websites of the bodies of public authority that have drawn up such lists, and (or) on the official websites designed to provide information support to MSEs.
The state and municipal property entities entered on those lists are to be held or used on a long-term basis (including at reduced lease rates) by MSEs and organizations belonging to the MSE support infrastructure, and can also be alienated, on a reimbursable basis, and transferred into the ownership of MSEs in accordance with the norms stipulated in the 2008 Law No 159-FZ and the RF Land Code.
The procedure of creating, maintaining, mandatory publication of such lists, as well as the procedure of leasing the state and municipal property entities entered on those lists (including the preferential rights and exemptions granted to MSEs registered as agricultural co-operatives engaged in socially important activities or other priority types of activity as established by state and municipal programs (or subprograms)), are to be regulated by the normative legal acts adopted by a relevant tier of public authority. The lease of land plots is regulated by civil and land legislations.
No sale of the state and municipal property entities entered on such lists is allowed, except in the form of reimbursable alienation of such property entities in order to transfer them into ownership by MSEs in accordance with the norms stipulated in Federal Law No 159-FZ (adopted in 2008) and the RF Land Code. No transfer of the right to such property entities is allowed, or collateral of that right, or its transfer as a contribution to the charter capital of any other economic subject; no transfer to third parties of the rights and obligations arising from the agreements of lease (or sublease) of such property entities, or their sublease, with the exception of sublease of such property entities to MSEs by organizations belonging to the MSE support infrastructure, and also in those cases when a property entity in question constitutes part or parts of premises, building, or structure (not more than 10 percent of its area, and not more than 20 m2 of total area), the rights to which belong to the entity that transfers that property entity (in accordance with the 2006 Federal Law 'On Protection of Competition', Article 17.1, Part 1, paragraph 14).
In late 2018, Rosimushchestvo approved the list of immovable property entities (except land plots), unencumbered by rights of third parties, to be held and (or) used on a long-term basis by MSEs. It consists of 827 property entities1.
An analysis of information released by Rosimushchestvo's territorial branches by way of preparation for privatization of new property entities revealed that among the property entities included in the current privatization program there were more than 150 leased immovable property entities. After reviewing the requests submitted by MSEs concerning their desire to realize their preferential right to buy out the federal property entities currently leased by them, Rosimushchestvo has prepared special directives regulating the terms of their privatization, and dispatched the corresponding orders to
1www.rosim.ru, January 1, 2018.
its territorial branches in the localities where said property entities are situated, so that the lessors could properly realize their rights. However, no purchase-and-sale agreements between the lessors (MSEs) and Rosimushchestvo or its territorial branches were formalized in 2018.
As far as legal regulation of the privatization process is concerned, an important alteration was introduced into the current privatization law (adopted in 2001) in May 2018, that addressed the buyers of state and municipal property entities (Article 5).
The norm whereby the buyers could not be the legal entities (hereinafter - offshore companies) registered in a country or territory entered on the list, approved by the RF Ministry of Finance, of countries and territories that grant tax exemption regimes and (or) do not disclose information on financial transactions (offshore zones) was in effect for less than a year1. The amended law stipulates that this norm applies only to those legal entities in that category who do not disclose and report information on their beneficiaries, beneficiary owners and controlling persons in the procedure established by the RF Government.
The text of Article 5 no longer contains any mention of offshore companies. Therefore, it no longer refers to the 'derivative' category of legal entities controlled by an offshore company or a group of entities that includes an offshore company. In this connection, the basic norm has remained - that the privatization process cannot involve state and municipal unitary enterprises and institutions, or legal entities with stakes in their charter capital amounting to more than 25 percent that are held by the RF, RF subjects, or municipal formations, except when state or municipal property is a contribution to their charter capital.
The terms 'group of persons' and 'control', with references to the notions stipulated in the 2006 Federal Law 'On Protection of Competition' (Articles 9, 11), are replaced by 'controlling person' as understood in the 2008 Federal Law 'On the Procedure for Facilitating Foreign Investment in Legal Entities Having Strategic Importance for National Defense and State Security' (Article 5), as well as the terms 'beneficiary' and 'beneficiary owner' as understood in the 2001 Federal Law 'On Prevention of Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism' (Article 3)2.
Another alteration introduced into the current privatization law has been the expansion of the property segment to which is does not apply (Article 3). It has been augmented by property held by right of economic jurisdiction, by right of permanent use, of by right of lease, or by FSUE Russian Post as of the moment of its reorganization
:At present, the list consists of 40 countries. However, the Republic of Cyprus - the traditional source of pseudo-foreign investments for the Russian economy over the past quarter century, was removed from that list in 2012.
2At the meeting on February 1, 2016 that addressed privatization issues, the RF President defined, in particular, certain conditions of privatization of companies with state stakes, including the provision whereby the would-be owners of assets earmarked for privatization should belong in Russia's jurisdiction, and that is was inadmissible to allow 'grey schemes', to withdraw assets to offshore zones, and to hide the identity of stakeholders. See http://kremlin.ru/events/president/news/51249
on the basis of the Federal Law 'On the Specific Features of Reorganization of Federal State Unitary Enterprise Russian Post, the Fundamental Principles of Operation of Joint-stock Company Russian Post, and the Introduction of Alterations to Some Legislative Acts of the Russian Federation' No 171-FZ dated June 29, 2018.
The Law, which came into force on 1 October 1, 2018, regulates the reorganization of FSUE Russian Post, its legal successor being those newly established non-public JSCs where the entire 100-percent stake is held by the RF, and the single stakeholder is named among its governing bodies alongside the board of directors, the council and the director general (Article 8). Its powers are exercised by the federal body of executive authority performing the function of federal property management in accordance with the procedure established by the RF Government, and the scope of its competence is clearly defined (Article 9).
6.1.3. The presence of the state in the economy and the issues of management of economic subjects operating in the public sector
In 2018, some important alterations were introduced in the list of strategic enterprises and joint-stock companies.
As of early December 2018, this list was augmented by only one company (Promsvyazbank PJSC). Over the same period, 2 FSUEs were struck off the list of strategic organizations (of these, one will be merged with another unitary enterprise, and the property complex of the other one will be transferred, as a state contribution to the charter capital, to State Corporation Rosatom), as well as 5 JSCs.
Among the latter, there are three previously created big vertically integrated structures (VIS), two of them being of nationwide importance. The entire capital (less 1 share) of Concern Granit-Electron JSC has been transferred to the charter capital of another VIS - Tactical Missiles Corporation JSC by way of payment for the additional placement of shares issued as a result of its increased charter capital, and this move appears to be in line with traditional practices. However, the transfer of 92.3 percent of shares in United Aircraft Corporation PJSC (UAC), the 100-percent federal stake in Roskhimzashchita OJSC, and federal stakes in another 6 JSCs, including 2 controlling stakes and 4 blocking stakes, as a property contribution to the charter capital of State Corporation Rostec appears to be much more arguable.
The corporation, created in 2007, soon began to acquire certain distinct features of a conglomerate without a clearly visible relation to any sector as a result of transfers of hundreds of federal stakes in other JSCs, including those established on the basis of reorganized FSUEs that had been struck off the list of strategic organizations and specializing in a variety of different fields1. Over the subsequent years, that trend
Gradually, sub-holding companies began to emerge inside the State Corporation (e.g., High Precision Systems, Technodinamika, Techmash). Some of them were created by special governmental decisions (e.g., United Engine Corporation), others emerged as separate entities before they were transferred to Rostec (e.g., Russian Helicopters). There were some precedents of a transfer of previously established
became even stronger. Suffice to say that the group of organizations transferred to Rostec by Rosimushchestvo over the course of last year included Production Corporation UralVagonZavod JSC and NPO Microgen (a reorganized unitary enterprise, previously subordinated to the RF Ministry of Health); FSUE PO More Shipyard in the Crimea is also being reorganized into a JSC. All these developments run contrary to the well-defined activity profiles of entities established more than 10 years ago as independent VISs (UAC PJSC, Roskhimzashchita OJSC).
Over the course of the year 2018, Rosimushchestvo was implementing measures designed to build other types of integrated structures. When applied with respect to Roscosmos, Rosatom, Transneft PJSC and UAC PJSC, and GLONASS JSC, these involved the implementation of some previously adopted major decisions (at the level of Presidential Executive Orders), mainly aimed at the enlargement of these entities. As far as other VISs are concerned (Russian Railways OJSC, ROSGEO JSC, Tactical Missiles Corporation JSC, Concern VKO Almaz-Antey, United Shipbuilding Corporation (USC)), the measures were aimed at upgrading these structures on the basis of new decisions adopted during the previous calendar year.
Among these, we should note USC: its charter capital has been augmented by a minority stake in Zelenodolsk R&D Bureau JSC situated in the Republic of Tatarstan, while a controlling stake in the latter, alongside a minority stake in A.M. Gorky Zelenodolsk Plant JSC, is to be transferred into the Republic's ownership, on condition that the decisions concerning the alienation of shares in these JSCs after the expiry of a five-year period should be coordinated with the RF Government; that their core activities should remain unchanged; and that over the period until 2023, investments should be attracted, including from private sources, for the purpose of comprehensive production capacity development and modernization of Zelenodolsk R&D Bureau JSC -in an amount not less than RUB 150 million, and A.M. Gorky Zelenodolsk Plant JSC -in an amount not less than RUB 300 million. In this connection, the RF Government has been assigned the task of finalizing the agreements between the Russian Federation, the Republic of Tatarstan, and the two JSCs concerning the development of the latter, making provisions in these agreements for specific measures designed to boost their R&D potential, to pool their available intellectual, industrial and financial resources in order to implement shipbuilding projects, and to ensure modernization of their production capacities through investments attracted by the region. The implementation of this project coupled with the potential interest of Rostec in shipbuilding assets may translate into adjustments of the government industrial policy in that sector - from support of 'national champions' towards diversification of centers and formats of government presence in the national economy.
Another major state corporation - Vnesheconombank - is undergoing the process of restructuring. After alterations were made in late 2018 to the 2007 law whereby its activity is regulated (No 452-FZ), its name was changed into VEB.RF.
VISs (Concern Avtomatika, Vega Radio Engineering Corporation, Concern Sozvezdie JSC, Control Systems JSC).
Within the charter capital of VEB.RF (not less than RUB 70 billion), two components were identified: the 'formed' component, and the component yet to be formed in accordance with the normative legal act of the RF Government by way of subsequent additional property contributions by the State, to be specified as follows:
- the composition of property earmarked as an additional contribution, including subsidies;
- the planned contribution cap (if necessary - distributed by year, with the description of procedure and timeframes for altering the contribution distribution procedure in those cases when the additional property contributions are not transferred in full in a given year);
- the procedure and timeframes for property contributions, and the conditions thereof, including but not limited to reducing the capital adequacy ratio to an acceptable minimum, as established in the State Corporation's financial policy memorandum, and increased by one percentage point, and to altering other financial sustainability indices of VEB.RF as envisaged in the said normative legal act of the RF Government, and the procedure for confirming compliance with the said conditions;
- the targeted use of the additional property contributions: the funding of projects implemented by VEB.RF (including the creation of reserves to cover potential losses incurred in the course of implementing those projects), the decisions concerning VEB.RF's participation in their funding having been adopted by the empowered managerial and collegial executive bodies of VEB.RF after the entry into force of the said normative legal act of the RF Government. The targeted use of the additional property contributions should not be understood as funding of the projects implemented by VEB.RF by way of implementing the nationwide, strategic or priority decisions of the RF President and the RF Government concerning the national economy, that are not compatible with the main directions, indices, constraints, or principles of investment and financial activity followed by VEB.RF;
- the requirements concerning an efficient use of the additional property contributions.
Several separate articles address the specific role of the state corporation in the functioning of development institutions, while the Accounts Chamber of the Russian Federation and other state bodies exercise control and supervision not only over the activity of VEB.RF, but also over that of those development institutions that receive support from VEB.RF, the source of that support being the federal budget.
The alterations introduced in the 2003 law on foreign trade regulation provides a framework whereby VEB.RF, with respect to exports, on the basis of the RF Government's decisions coordinates the activity of the Russian Export Center, the Russian Agency for Export Credit and Investment Insurance (EXIAR), State Specialized Russian Export-Import Bank JSC (Eximbank of Russia), and some other development institutions.
In the event of a transfer, by decision of VEB.RF Supervisory Board, of the 100 percent stake in the Russian Export Center's charter capital into federal ownership, the
sole shareholder of the Center will be the Russian Federation, while the Center's charter capital can be increased at a later date by federal contributions, if the Russian Agency for Export Credit and Investment Insurance should become less financially sustainable, and the RF Government should determine, in a procedure similar to that established for the charter capital of VEB.RF itself, the transfer of those additional property contributions.
Earlier, in late 2017, the norms were introduced whereby it became possible to create, under the state corporation's supervisory board, special committees for preliminary consideration of certain issues, including standing committees (on strategy, audit, human resources, reimbursement, and other issues), as well as collegiate bodies, appointed by the supervisory board and the chairperson. Besides, the norms regulating the procedure for approving certain types of deals by the state corporation's executive bodies were added.
Last year, the activity of biggest companies with state stakes in the corporate control market was rather slack, but it became evident that the criteria for estimating the feasibility of negotiated deals should be more transparent - both from the point of view of the interests of the State and in the contest of the participating companies' development strategies.
The purchase by VTB Bank of a 29.1-percent stake in the retail chain Magnit for RUB 138 billion from its former major stakeholder, which was one of the most important events of 2018, was followed by another major deal only 3 months later - the sale of a 11.8-percent stake, without disclosing the deal value, to Marathon Group, an investment company specializing in the main in pharmaceutical infrastructure.1 The indirect presence of the State in the retail sector, in a degree that is not sufficient for actually influencing the corporate governance procedures there, has given rise to some questions - and questions also arise in connection with a shrinkage of state participation in other companies involved in those types of economic activity where the presence of the State has been traditional (in foreign countries as well).
State Corporation Rostec reduced its participation in Kalashnikov Concern to the level of a blocking stake by selling 26 percent of shares to TransKomplektHolding for RUB 1.5 billion. The future development of Kalashnikov Concern, which for a long time has been a symbol of the national firearms industry, will have to do with its current rebranding strategy and reorientation to the production of means of transport2.
While moving on to the issues of managing joint-stock companies with state participation, we may note the strictest executive discipline visible in the organization of annual general shareholder meetings. The meetings were held by 47 out of 48 JSCs entered on the Special List approved by Directive of the Government of the Russian Federation No 91-r dated January 23, 2003, where the standpoint of the State as a shareholder on a number of the most important issues was determined at the government
1https://www.kommersant.ru/doc/3549909,
https://www.rbc.ru/business/24/05/2018/5b0410ca9a79476f56976cc5
2https://lenta.ru/news/2018/02/15/ak/
level); by all the JSCs not included in the Special List, where the RF was the sole shareholder, and 88.7 percent of those JSCs that were not included in the Special List and with state stakes amounting to more than 2 percent but less than 100 percent of their charter capital.
In accordance with the decisions of the RF Government issued with regard to annual general shareholder meeting, in the course of the corporate year 2017, a total of 190 candidates for the boards of directors (supervisory boards) of JSCs entered on the Special List were approved1, including 189 professional attorneys (instead of 182 persons recommended by the special Commission (attached to Rosimushchestvo) assigned the task of selection of independent directors, representatives of the shareholder interests of the RF, and independent experts to be elected to the managerial and control bodies ofjoint-stock companies), 64 independent directors ( out of a total of 68 recommended persons) and 143 civil servants (instead of 148 as recommended by the Commission)2.
The overall number, in absolute terms, of state representatives in the boards of directors of JSCs entered on the Special List somewhat increased relative to 2017 thanks to the inflow of civil servants. The total number of professional directors - that is, professional attorneys and independent directors taken together - remained the same. At the same time, the trend that first appeared after the period 2014-2015 - that of an increasing relative share of civil servants and professional attorneys alongside a shrinkage of the relative share of independent directors in companies' managerial bodies - once again revealed itself (Table 8).
Table 8
The movement and structure of state representatives in the managerial and control bodies of JSCs entered on the Special List, in 2009-2018
Year JSCs, units State representatives in boards of directors (supervisory boards) In audit commissions: independent experts, number
total civil servants professional attorneys independent directors
number percent number percent number percent number percent
2009 36 342 100.0 163 47,7 120 35.1 59 17.2
2010 49/59a 386 100.0 193 50,0 117 30.3 76 19.7
2011 51 416 100.0 181 43,5 150 36.1 85 20.4
2012 57 434 100.0 141 32,5 205 47.2 88 20.3 15
2013b 63 452 100.0 127/122c 28,1 228/245c 50.4 97/102c 21.5 27
2014 51 402 100.0 106/104c 26,4 199/197c 49.5 97/90c 24.1 45
2015b 50 390 100,0 118 30.3 178 45.6 94 24.1 54
2016b 50 404 100,0 136 33.7 189 46.8 79 19.5 65/66d
2017e 48 385 100,0 131 34.0 179 46.5 75 19.5 56
2018f 47/48 397/4 05 100,0 143 36.0 190 47.9 64 16.1 65
a - data are also available on the election of professional directors to the managerial bodies of 59 JSCs;
1 Less State Transport Leasing Company PJSC (STLC, the shareholder rights belong to the RF Ministry of Transport) and MIT Corporation JSC (the shareholder rights belong to State Corporation Roscosmos) ; and including FGC UES PJSC.
2The final decisions concerning the appointment of candidates for the managerial and control bodies of JSCs entered on the Special List are approved by the RF Government.
b - including OJSC Novorossiysk Commercial Sea Port, where only civil servants were elected to the board of directors and the audit commission;
c - other data are also available concerning the by-category distribution of state representatives (presented in the denominator), which probably are preliminary estimates, although the number of professional directors (professional attorneys and independent directors) for 2014 released by Rosimushchestvo (287) corresponds to the total number for all the groups (presented in the denominator);
d - later data for a larger number of JSCs are shown in the denominator;
e - including Novorossiysk Commercial Sea Port OJSC and FGC UES; as of August 1, 2017, these companies had not yet established their boards of directors and audit commissions in the course of their 2017 annual general shareholder meetings, and so we applied the extraordinary general shareholder meetings data as of September 15, 2017 in accordance with RF Government Directive No 4643p-P13 dated July 3, 2017;
f - the total number of state representatives in boards of directors in the denominator is higher than the sum of state representatives by category (civil servants, professional attorneys, independent directors), which also corresponds to the lower number of JSCs on the Special List.
Source: Year-end Reports on the Management of Federal Stakes in OJSCs and the Use of the Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share') for 2011-2017; own calculations.
Over the period 2014-2018, in the group of companies not included in the Special List, the number of civil servants per company increased from 2.04 to 3.04, while the number of professional directors declined from 5.62 to 5.291 (the number of professional attorneys increased from 3.86 to 4.04, but that of independent director declined from 1.76 to 1.33).
In 2018, civil servants prevailed in the structure of audit commissions (118 persons vs. 65 independent experts, or 64.5 percent), but the number of the latter increased, once again hitting its record high of 2016. Over the last 5 years, their per company number jumped more than 1.5 times (from 0.88 in 2014 to 1.35 in 2018).
As for the structure of the managerial bodies of companies not included in the Special List (Table 9), it should be said that in 247 JSCs, where the states ownership of a controlling or blocking stake ensured that state representatives took up a total of 1,371 seats on the boards of directors (or supervisory boards) of JSCs,2 more than half of them were professional directors - 782 persons, or 57 percent, while the number of civil servants was 589, or 43 percent. In 39 JSCs with the RF stakes in their charter capital amounting to less than 25 percent, 100 percent of persons representing the interests of the State on the boards of directors (or supervisory boards) were civil servants (83 board members). However, even in spite of the effects produced by that factor, the total number of civil servants participating in the boards of directors (or supervisory boards) of the JSCs off the Special List dropped relative to 2017, when their number had been 704.
1 Data released by Rosimushchestvo.
2Less (1) those JSCs where the State does not hold a blocking stake (62 units) and (2) those JSCs where the State holds a controlling or blocking stake, but the decisions concerning the appointment of professional directors and independent experts have not been passed for various objective reasons (77 units).
Table 9
The movement and structure of state representatives in the managerial and control bodies of JSCs off the Special List, in 2009-2018
Year JSC, units State representatives on boards of directors (supervisory boards) (other than civil servants) In audit commissions: independent experts, number
total professional attorneys independent directors
number percent number percent number percent
2009 233 431 100.0 310 71.9 121 28.1
2010 389 707 100.0 493 69.7 214 30.3
2011 512 1,109 100.0 830 74.8 279 25.2
2012 822 1,860/1,869* 100.0 1,350 72.6 510/519* 27.4 23**
2013 637/245*** 1,715 100.0 1,092 63.7 623 36.3 335
2014 683/159*** 2,094 100.0 1,382 66.0 712 34.0 498
2015 527/151*** 1,660 100.0 1,267 76.3 393 23.7 330
2016 479/123*** 1,535 100.0 1,346 87.7 189 12.3 353
2017 297/107*** 978 100.0 864 88.3 114 11.7 325
2018 247/77*** 782 100.0 703 89.9 79 10.1 332
* - data are also available on the election of 1,869 professional directors, including 519 independent directors;
** - data are also available on the election of 21 private individuals as representatives in audit commissions;
*** - the denominator is the number of those JSCs where the State holds a controlling or blocking stake, but the decisions concerning the appointment of professional directors and independent experts have not been passed for various objective reasons.
Source: Year-end Reports on the Management of Federal Stakes in OJSCs and the Use of the Russian Federation's Special Right to Participate in an OJSC's Management ('Golden Share') for 2011-2017; own calculations.
As follows from data presented in Table 9, in 2017, while the total number of professional directors notably shrank in absolute terms (by 1/5), the relative share of professional attorneys in that group continued to increase, and their relative share in the total number of state representatives (beside civil servants) shrank to 10 percent. The number of independent experts in audit commissions in 2018 slightly increased relative to 2017 - approximately to the same level as in 2013 and 2015.
The per company number of professional directors on boards of directors (or supervisory boards) dropped from 3.29 to 3.16 (the 2015 level), while that of independent experts sitting on audit commissions increased from 1.09 to 1.34, thus rising 1.8 times above its 2014 level.
After the extensive adjustment of the governance mechanism for JSCs with state stakes a year earlier, it underwent no noteworthy alterations in 2018.
In order to establish personal responsibility of state representatives in the executive bodies of JSCs for their failure to properly protect state interests, a draft law has been submitted to parliament whereby certain amendments to the RF Code of Administrative Offenses are suggested. The RF Government is currently considering draft laws regulating the insurance of responsibility of those members of the board of directors of a JSC with a state stake who occupy deputy positions in government agencies or who are civil servants.
As far as standardization of the governance procedures for all companies with state participation is concerned, we should make note of the following draft documents that were under consideration over the course of last year:
• the criteria of selecting candidates for membership in the single (collegiate) executive body, the board of directors (or supervisory board), and the audit commission of a JSC;
• a model program of alienation of non-core assets of a JSC off the Special List, the stake held in its capital by the RF being more than 50 percent;
• methodological recommendations for reimbursement of CEOs of state corporations, state-owned companies, and economic societies whose core activity outlined in their charter is funded from the budget, and the stake held in their capital by the RF is more than 50 percent, including those entered on the Special List;
• methodological guidelines for applying the key performance indicators for state corporations, state-owned companies, and economic societies whose core activity outlined in their charter is funded from the budget, and the stake held in their capital by the RF is more than 50 percent (at present, the wording of the guidelines as amended in 2014 is in effect).
In the framework of implementation of the norms stipulated in the new Corporate Governance Code (CGC), introduced in 2014, Rosimushchestvo in its capacity of a shareholder analyzed the annual reports of 12 biggest state-owned companies for the corporate year 2017, approved by their annual general shareholder meetings in 2018, from the point of view of their compliance with the principles and recommendations stipulated in the CGC.
On the basis of that analysis, as well as the information submitted by those state-owned companies at Rosimushchestvo's request, it can be said that all the 12 JSCs indeed entered in their annual reports information concerning their implementation of the norms and principles stipulated in the Code.
As shown by the analysis of the reports submitted by JSCs, the overall roadmap implementation index for the provisions stipulated in the CGC as of late summer 2018 was approximately 90 percent, just as a year earlier.
The highest rate of implementation of the Code's provisions has been noted with regard to the following 3 sections:
- corporate secretary of a JSC (96 percent vs. 100 percent in 2017, 60 percent in 2016);
- shareholder rights and equal opportunities for exercising these rights (93 percent, just as a year earlier, in 2016 - 86 percent);
- risk management and internal control systems (also 93 percent).
The implementation indicators for another 4 sections of the CGC (board of directors, reimbursement of the members of a board of directors, executive bodies and other CEOs, corporate information disclosure, information policy, and significant corporate acts) were above 70 percent.
The dividend policy was shaped by the requirement to comply with the budget assignment, one of its parameters being that the amount earmarked for the payment of dividends could not be less than 50 percent of a company's year-end net profit calculated in accordance with the International Financial Reporting Standards (hereinafter - IFRS).
From 2016 onwards, the RF Government has been issuing some separate decisions whereby JSCs with federal stakes in their capital were obliged to earmark for the payment of dividends not less than 50 percent of their net profit, thus making it possible for the RF Ministry of Finance to introduce certain adjustments while preparing the draft of a federal budget law. At the same time, as before, the RF Government Directive No 774-r dated May 29, 2006 (as amended in May 2017) sets forth the norm whereby not less than 25 percent of their profit should be earmarked for the payment of dividends.
Rosimushchestvo, in the course of its year-end campaign of 2017 for the launch of annual general shareholder meetings by JSC, adopted a set of necessary and sufficient measures designed to maximize the amount of dividend-generated federal budget revenue with due regard for the current market situation, external and internal factors, relevant government decisions, and the necessity to implement long-term economic development programs. These efforts translated into a revenue level that was above the planned target set in the federal budget law. Almost the entire amount of dividends on federal stakes received at year-end 2017 was paid by the JSCs included in the Special List.
Meanwhile, by the alterations introduced into RF Government Decree No 739 dated December 3, 2004, whereby the powers of federal bodies of executive authority (FBEA) to exercise their ownership rights to property of FSUEs are regulated, the minimum amount of a transfer to the federal budget for the latter was increased from 25 to 50 percent of their disposable profit after taxes and other mandatory payments (less incomes and expenditures resulting from revaluation of their marketable securities and related to the incomes and expenditures taken into account when calculating the amount of tax on profit of organizations). The relevant decisions should be made by those FBEAs that exercise authority over those companies, irrespective of their being included in a privatization program.
Similarly to the procedure that regulates the payment of dividends by JSCs with state stakes, in those cases when a FSUE is required to file financial reporting, including consolidated reports, in accordance with the IFRS, the amount of its profits due to be transferred to the federal budget cannot be less than 50 percent of its net profit calculated on the basis of data entered in said reports. If that amount is higher than the amount of net profit calculated on the basis of data entered in the accounting (financial) reports submitted by that unitary enterprise, the amount of dividends is derived from its retained earnings. However, it must be added that the official cap on dividends for JSCs, set in May 2017, amounts to only 25 percent.
6.1.4. The budgetary effect of government property policy
In 2018, in contrast to the situation over the previous year, the movement of federal budget revenues that had to do, in one or other way, with public property was positive. There is evident growth of revenues generated both by the use of public property (renewable sources) and by privatization and the sale of property (non-renewable sources).
Tables 10 and 11 show data taken from the reports on federal budget execution, in particular the revenues generated by the use of public property and the sale of public property entities belonging only to some specified categories of tangible property1.
1 Here, we do not consider the federal budget revenues generated by payments for the use of natural resources (including biological water resources, revenues from the use of forest fund, and the extraction of mineral resources), compensation of the losses incurred by the agricultural production sector as a result of confiscation of agricultural land, revenues generated by financial operations (revenues from placement of budget funds (revenues from federal budget residuals and their investment: from 2006 onwards, these include the revenues from the management of the RF Stabilization Fund (and from 2009 onwards - the Reserve Fund and the National Welfare Fund)); revenues from investment of monies accumulated in the course of trading RF stocks in the auction market); interest on budget-funded domestic loans, covered by the federal budget; interest on government loans (monies received from the governments of foreign countries and foreign legal entities as interest payments on RF government loans); money transfers from legal entities (enterprises and organizations), RF subjects, municipal formations received as interest and guarantee payments on loans received by the RF from foreign governments and international financial organizations; revenues from paid services rendered to the population or monies received by way of compensation of government expenditures; transfers of the RF Central Bank's profits; certain categories of payments from state and municipal enterprises and organizations (patent duties and registration fees for official registration of software, databases, integral microcircuit topologies; and other revenues which until 2004 were part of mandatory payments of state organizations (except revenues generated by the operations of Joint Venture Vietsovpetro (from 2001) and transfers of part of profits generated by FSUEs (from 2002); revenues from the implementation of product share agreements (PSA); revenues from the disposal of confiscated and other property earmarked as government revenue (including property transferred to state ownership in the procedure of inheritance or gift, or treasure trove appropriation); revenues generated by lotteries; other revenues from the use of property and rights in federal ownership (revenues from the execution of rights to the results of intellectual activity (R&D and technologies) intended for military, special or dual use; revenues generated by the execution of rights to the results of scientific and technological research held by the RF; revenues generated by the exploitation and use of property relating to motor roads, motor road levies imposed on transport vehicles registered in the territories of other states; execution of the Russian Federation's exclusive right to the results of intellectual activity in the field of geodesy and cartography; fees for the use of spatial data and materials that are not subject to copyright, kept in the Federal Fund of Spatial Data; and other revenues from the use of property in the ownership of the Russian Federation); revenues generated by organizations from the permitted types of economic activity and earmarked for transfer to the federal budget; revenues from realization of government reserves of precious metals and precious stones.
By contrast with the previous years, the law on federal budget execution for 2015-2017 contains no aggregate data listed under each revenue classification code or sub-code, or listed according to the classifications of transactions in the public administration sector on revenue side (these are listed only by their classification code for each revenue administrator). Therefore, we used data from the reports on
Table 10
Federal budget revenues generated by the use of public property (renewable sources) in 2000-2018, millions of rubles
Year Total Dividends on shares (20002018) and revenues generated by other forms of participation in capital (2005-2018) Payment for lease of land in state ownership Revenues generated by lease of property in state ownership Revenues from transfer of part of net profits of FSUEs after taxes and other mandatory payments Revenues generated by Joint Venture Vietsovpetro
2000 23,244.5 5,676.5 - 5,880.7 - 11,687.3a
2001 29,241.9 6,478.0 3,916.7b 5,015.7c 209.6d 13,621.9
2002 36,362.4 10,402.3 3,588.1 8,073.2 910.0 13,388.8
2003 41,261.1 12,395.8 10,276.8e 2,387.6 16,200.9
2004 50,249.9 17,228.2 908.1f 12,374.5g 2,539.6 17,199.5
2005 56,103.2 19,291.9 1,769.2h 14,521.2' 2,445.9 18,075.0
2006 69,173.4 25,181.8 3,508.0h 16,809.9' 2,556.0 21,117.7
2007 80,331.85 43,542.7 4,841.4h 18,195.2i 3,231.7 10,520.85
2008 76,266.7 53,155.9 6,042.8h 14,587.7i 2,480.3 -
2009 31,849.6 10,114.2 6,470.5h 13,507.6 i 1,757.3 -
2010 69,728.8 45,163.8 7,451.7h 12,349.2J 4,764.1 -
2011 104,304.0 79,441.0 8,210.5h 11,241.25> 4,637.85 773.4
2012 228,964.5 212,571.5 7,660.7k 3,730.3' 5,002.0 -
2013 153,826.25 134,832.0 7,739.7k 4,042.7' +1,015.75m 6,196.1 -
2014 241,170.6 220,204.8 7,838.7k 3,961.6* +1,348.5m 7,817.0 -
2015 285,371.1 259,772.0 9,032.3k 5,593.8l +1,687.8m 9,285.2 -
2016 946,723.35/ 254,328.3n 918,969.1/ 226,574.1n 9,412.4k 5,843.25° +3,026.7m 9,471.9 -
2017 275,168.2 251,327.0 9,825.1k 5,318.4° +2,857.7m 5,840.0 -
2018 333,397.8 312,565.8 9,784.8k 1,988.6o +2,922.6m 6,136.0 -
a - according to data released by the RF Ministry of Property Relations, in the Law on Federal Budget Execution for 2000 this item was not specified separately; instead, the amount of payment received from state-owned enterprises was entered (RUB 9,887.1 million) (without any components being specified); b - the amount of lease payments (a) for the use of agricultural land and (b) for the use of land plots in the territories of towns and settlements;
c - the amount of revenues from the lease of property consolidated to (a) scientific research organizations, (b) educational establishments, (c) healthcare institutions, (d) state museums, state cultural and arts institutions, (e) archival institutions, (f) the RF Ministry of Defense, (g) organizations subordinated to the RF Ministry of Railways, (h) organizations providing research-related services to the academies of sciences with the status of a state entity, and (i) other revenues from the lease of property in state ownership;
d - according to data released by the RF Ministry of Property Relations, in the Law on Federal Budget Execution for 2001 this item was not specified separately, this value turned out to be the same as the amount of other revenues received as part of payments transferred by state and municipal organizations; e - total amount of revenues generated by the lease of property entities in public ownership (without specifying the amount of lease payments for land);
f - the amount of lease payments (a) for the use of land plots in the territories of towns and settlements (b) for the use of land plots in federal ownership after the delineation of titles to land plots between different tiers of government;
federal budget execution as of January 1, 2016; January 1, 2017; and January 1, 2018 (annual data), and the monthly report on federal budget execution as of January 1, 2019.
g - the amount of revenues from the lease of property consolidated to (a) scientific research organizations, (b) educational establishments, (c) healthcare institutions, (d) state cultural and arts institutions, (e) state archival institutions, (f) institutions of the federal postal service of the RF Ministry of Communications and Informatization, (g) organizations providing research-related services to the academies of sciences with the status of a state entity, and (h) other revenues generated by the lease of property in federal ownership;
h - the amount of lease payments after the delineation of titles to land plots between different tiers of government and revenues generated by the sale of right to conclude lease agreements in respect of land plots in federal ownership (with the exception of land plots held by federal autonomous institutions (2008-2011) and budget-funded institutions (2011));
i - the amount of revenues from the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them, and property held by right of economic jurisdiction by FSUEs: properties transferred for operative management to organizations with the status of a state entity: (a) scientific research institutions, (b) organizations providing research-related services to the Russian Academy of Sciences and to sectoral academies of sciences, (c) educational establishments, (d) healthcare institutions, (e) federal postal service institutions of the Federal Communications Agency, (f) state cultural and arts institutions, (g) state archival institutions, and (h) other revenues generated by the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them, and property held by right of economic jurisdiction by FSUEs1 (for the period 2006-2009 - less revenues from the permitted types of economic activity and revenues from the use of federal properties situated outside RF territory, which are received abroad, and which were not listed as a separate revenue item in the previous years2); j - the amount of revenues from the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them (with the exception of federal autonomous institutions and budget-funded institutions): properties transferred for operative management to organizations with the status of a state entity: (a) scientific research institutions, (b) organizations providing research-related services to the Russian Academy of Sciences and to the 'branch' academies of sciences, (c) educational establishments, (d) healthcare institutions, (e) state cultural and arts institutions, (f) state archival institutions, (g) properties held by right of operative management by the RF Ministry of Defense its subordinated institutions (2010), (h) properties in federal ownership disposed of by the Executive Office of the RF President (2010), and (i) other revenues from the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them (less revenues from the permitted types of economic activity and revenues from the use of federal properties situated outside RF territory, which are received abroad); k - the amount of lease payments after the delineation of titles to land plots between different tiers of government and revenues generated by the sale of right to conclude lease agreements in respect of land plots in federal ownership (with the exception of land plots held by federal budget-funded institutions and autonomous institutions), and (a) lease payments received for the lease of land plots in federal ownership, situated in public motor road precincts of federal importance (2012-2018), (b) payments for
1 For the period 2008-2009, there is no mention of FSUEs as sources of revenues generated by the lease of property consolidated to them by right of economic jurisdiction, while the revenues from the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them do not include revenues generated by property held by autonomous institutions.
2According to data released by the RF Ministry of Property Relations, the revenues from the use of federal properties situated abroad (less the revenues received by the Russian partner in Joint Venture Vietsovpetro) amounted to RUB 315 million in 1999 and RUB 440 million in 2000. Thereafter, the major role in organizing the commercial use of federal immovable property situated abroad was assigned to FSUE Goszagransobstvennost.
the execution of agreements on the establishment of servitude with regard to land plots situated within public motor road precincts of federal importance for the purposes of building construction (or reconstruction), capital repairs and exploitation of road service entities, installation and exploitation of utility networks, installation and exploitation of elevated advertizing structures (2012 and 2014-2018), and (c) payments received in the framework of agreements on the establishment of servitude with regard to land plots in federal ownership (2015-2018);
l - the amount of revenues from the lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them (with the exception of budget-funded institutions and autonomous institutions): properties transferred for operative management to organizations with the status of a state entity: (a) scientific research institutions, (b) educational establishments, (c) healthcare institutions, (d) state cultural and arts institutions, (e) state archival institutions, (f) other revenues from the lease of property held by right of operative management by federal treasury institutions, (g) federal bodies of state authority, the Bank of Russia, and the managerial bodies of RF government extrabudgetary funds, (h) federal treasury institutions (2015 only) (less revenues from the use of federal properties situated outside RF territory, which are received abroad); m - the amount of revenues from the lease of RF treasury property (with the exception of land plots); n - less the revenues generated by the sale of the stake in Rosneft (RUB 692,395 billion) (less interim dividend payments);
o - for the period 2016-2018, we apply aggregate data, without identifying by-sector groups of institutions. The more general classification consist only of 2 revenue categories, distinguished depending on the recipient of revenues generated by lease of property (federal bodies of state authority, the Bank of Russia and the managerial bodies of RF government extrabudgetary funds, and federal treasury institutions).
Source: Laws on federal budget execution for the period 2000-2014; reports on federal budget execution as of January 1, 2016; January 1, 2017; and January 1, 2018 (annual data); and the monthly report on federal budget execution as of January 1, 2019, www.roskazna.ru; own calculations.
In 2018, the aggregate revenues generated by renewable sources increased by more than 21 percent relative to the previous year.
This was achieved in the main due to the receipts of dividends in the federal budget (RUB 312.6 billion), which increased by almost a quarter, and rose above the previous record high of 2015 (RUB 259.8 billion). The receipts of part of profits paid by unitary enterprises, after having shrunk in 2017 by more than 5 percent, increased once more, while still staying below their 2013 level in absolute terms (RUB 6.1 billion).
The amount of revenue generated by lease of land plots remained practically unchanged (approximately RUB 9.8 billion)1. At the same time, the aggregate revenues generated by lease of federal property (approximately RUB 4.9 billion) demonstrated a sharp plunge (by 40 percent). This happened as a result of shrinkage, by more than
1The amount of lease payments for land plots, just as a year earlier, includes lease payments received for the lease of land plots in federal ownership situated in public motor road precincts of federal importance, payments for the execution of agreements on the establishment of servitude with regard to land plots situated within the easement areas of general-use motorways of federal importance for the purposes of building construction (or reconstruction), capital repairs and exploitation of road service entities, installation, relocation, restructuring, and exploitation of utility networks, and installation and exploitation of elevated advertizing structures; and payments for the execution of agreements on the establishment of servitude with regard to land plots in federal ownership which are specified for the first time in the budget reports for 2015.
60 percent (to less than RUB 2.0 billion) of the revenues from lease of property held by right of operative management by federal bodies of state authority and by the state institutions established by them (with the exception of budget-funded institutions and autonomous institutions). The revenues generated by lease of property which is held by the RF Treasury (except land plots), on the contrary, somewhat increased (by 2.3 percent), amounting to more than RUB 2.9 billion. For the first time since they had been identified in budget reports (from 2013 onwards) as a separate entry, they began to prevail in the aggregate structure of revenues generated by lease of federal property.
As in the previous year, dividends held a dominant position in the structure of renewable federal budget revenue sources (approximately 94 percent vs. 91 percent a year earlier). The relative share of lease payments for land plots amounted to 2.9 percent; that of payments for property lease - to 1.5 percent; and that of profits transferred by FSUEs - to 1.8 percent. Their aggregate relative share declined relative to 2017.
While proceeding to an analysis of federal budget revenues generated by the privatization and sale of state property (Table 11), it should be noted that, from 1999 onwards, the revenues from the sale of such assets (state stakes, and over the period 2003-2007 - also land plots1) have been treated as a source of funding to cover budget deficit.
Table 11
Federal budget revenues generated by the privatization and sale of property (non-renewable sources) in 2000-2018, millions of rubles
Year Total Sale of shares in federal ownership (20002014) and other forms of state participation in capital (2005-2018)a Sale of land plots Sale of miscellaneous properties
2000 27,167.8 26,983.5 - 184.3b
2001 10,307.9 9,583.9 119.6c 217.5+386.5+0.4 (ITA)d
2002 10,448.9 8,255.9e 1,967.0f 226.0g
2003 94,077.6 89,758.6 3,992.3h 316.2+10.5'
2004 70,548.1 65,726.9 3,259.3J 197.3+1,364.6+0.04 (ITA)k
2005 41,254.2 34,987.6 5,285.7' 980.9m
2006 24,726.4 17,567.9 5,874.2' 1,284.3n
2007 25,429.4 19,274.3 959.6o 5,195.5p
2008 12,395.0 6,665.2+29.6 1,202.0q 4,498.2+0.025 (ITA)r
2009 4,544.1 1,952.9 1,152.5q 1,438.7r
2010 18,677.6 14,914.4 1,376.2q 2,387.0+0.039 (ITA)r
2011 136660.1 126207.5 2425.2q 8,027.4r
2012 80,978.7 43,862.9 16,443.8q 20,671.7+0.338 (ITA)r
2013 55,288.6 41,633.3 1,212.75q 12,442.2+0.310 (ITA)r
2014 41,155.35 29,724.0 1,912.6q 9,517.7+1.048 (ITA)r
2015 18,604.1 6,304.0 1,634.55q 10,665.5+0.062 (ITA)r
2016 416,470.5 406,795.2 2,112.7q 7,562.6+0.012 (ITA) r
2017 21,906.7 14,284.5 1,199.6q 6,421.3+1.3 (ITA)r
2018 28,251.3 12,787.5 1,660.6q 13,803.0+0.2 (ITA)r
a - treated as an internal source of funding to cover the federal budget deficit, amount to RUB 29.6 million for 2008 (as stated in the Report on Federal Budget Execution as of 1 January 2009); this is a federal budget revenue item, but it is absent in the 2008 Law of Federal Budget Execution; b - revenues generated by privatization of entities in public ownership and treated as an internal source of funding to cover the federal budget deficit;
:Data for the period 2003-2004, including revenues generated by sale of leasing right.
c - revenues generated by the sale of land plots and the right to lease land plots in state ownership (with special entry concerning those land plots in which privatized enterprises are situated), treated as federal budget revenues;
d - the amount of revenues generated by (1) the sale of property in federal ownership, treated as an internal source of funding to cover the federal budget deficit, (2) revenues generated by (a) the sale of apartments, (b) the sale of state-owned production and non-production assets, transport vehicles, other equipment and tangible assets, and (3) revenues generated by the sale of intangible assets (ITA), treated as federal budget revenues;
e - including RUB 6 million generated by the sale of shares held by RF subjects; f - revenues generated by the sale of land and intangible assets, their amount not specified as a separate entry, treated as federal budget revenues;
g - revenues generated by the sale of property in public ownership (including RUB 1.5 million generated by the sale of properties held by RF subjects), treated as an internal source of funding to cover federal budget deficit;
h - this figure includes revenues generated by (1) the sale of land plots in which immovable property entities are situated, which prior to their alienation were federal property, the proceeds being transferred to the federal budget, (2) the sale of other land plots, as well as the sale of the right to conclude lease agreements in respect of those land plots, (3) the sale of land plots after delineation of titles to land plots, as well as the sale of the right to conclude lease agreements with respect to those land plots, the proceeds being transferred to the federal budget; these are treated as an internal source of funding to cover the federal budget deficit;
i - the sum of (1) revenues generated by the sale of properties in federal ownership, treated as an internal source of funding to cover the federal budget deficit, and (2) revenues generated by the sale of intangible assets, treated as federal budget revenues;
J - this figure includes the revenues generated by: (1) the sale of land plots prior to delineation of public titles to land plots, in which immovable property entities are situated, which prior to their alienation were federal property, the proceeds being transferred to the federal budget, (2) the sale of other land plots, as well as the sale of the right to conclude lease agreements in respect of those land plots, (3) the sale of land plots after delineation of titles to those land plots, as well as the sale of the right to conclude lease agreements with respect to those land plots, the proceeds being transferred to the federal budget; these are treated as an internal source of funding to cover federal budget deficit; k - the sum of (1) revenues generated by the sale of properties in federal ownership, treated as an internal source of funding to cover the federal budget deficit, (2) revenues generated by (a) the sale of apartments, (b) the sale of equipment, transport vehicles and other tangible assets, the proceeds being transferred to the federal budget, (c) the sale of the products of ships recycling industry, (d) the sale of property held by state unitary enterprises and state institutions, as well as the sale of military property, (e) the sale of the products of recycled armaments, military technologies and ammunition, (3) revenues generated by the sale of intangible assets (ITA); these are treated as federal budget revenues; ' - this figure includes the revenues generated by: (1) the sale of land plots prior to delineation of titles to land plots, in which immovable property entities are situated, which prior to their alienation were federal property, (2) the sale of land plots after delineation of titles to land plots, the proceeds being transferred to the federal budget, (3) the sale of other land plots, which prior to delineation of titles to land plots between different tiers of government were public property, and which are not earmarked for housing construction (this subdivision is true only with regard to data for 2006), treated as sources of funding to cover federal budget deficit;
m - revenues generated by the sale of tangible and intangible assets (less federal budget revenues generated by disposal and the sale of confiscated property and other property treated as government revenue), this figure includes revenues generated by (a) the sale of apartments, (b) the sale of property held by FSUEs, (c) the sale of property held by right of operative management by federal institutions, (d) the sale of military property, (e) the sale of the products of recycled armaments, military technologies
and ammunition, (f) the sale of other properties in federal ownership, (g) the sale of intangible assets; these are treated as federal budget revenues;
n - revenues generated by the sale of tangible and intangible assets (less revenues received as profit share in the framework of product share agreements (PSA) and federal budget revenue generated by the disposal and sale of heirless property, confiscated property, or other property earmarked as government revenue), this figure includes revenues generated by (a) the sale of apartments, (b) the sale of property held by FSUEs, (c) the sale of property held by right of operative management by federal institutions, (d) the sale of military property, (e) the sale of the products of recycled armaments, military equipment and ammunition, (f) the sale of other properties in federal ownership; these are treated as federal budget revenues;
o - revenues generated by the sale of land plots after delineation of titles to land plots formerly in federal ownership, treated as sources of funding to cover federal budget deficit;
p - revenues generated by the sale of tangible and intangible assets (less revenues received as profit share in the framework of product share agreements (PSA) and federal budget revenues generated by the disposal and sale of heirless property, confiscated property, or other property earmarked as government revenue, and revenues from the sale of timber confiscated from timber poachers), this figure includes revenues generated by (a) the sale of apartments, (b) the sale of property held by FSUEs, (c) the sale of property held by right of operative management by federal institutions, (d) the sale of redundant movable and immovable military properties and other properties held by federal bodies of executive authority that involve military service, and services that are equated to military service, (e) the sale of military-purpose products from the stores of federal bodies of executive authority within the framework of cooperation in the field of military technologies, (f) revenues generated by the sale of other properties in federal ownership; these are treated as federal budget revenues; q - revenues generated by the sale of land plots in federal ownership (less land plots held by federal autonomous and budget-funded institutions (data for 2011-2012)), treated as federal budget revenues; prior to 2015, these also include payments for the enlargement of private land plots resulting from their redistribution, as well the redistribution of land plots in federal ownership;
r - revenues generated by the sale of tangible and intangible assets (less revenues received as profit share in the framework of product share agreements (PSA), and federal budget revenue generated by the disposal and sale of heirless property, confiscated property, or other property earmarked as government revenue, and revenues from the sale of timber confiscated from timber poachers) (data for 2008-2011), revenues generated by the release of tangible assets from the state reserve of special raw materials and divisible materials (in the part of revenues generated by the sale, temporary lending, and other uses thereof); and with regard to data for 2012-2016, also revenues generated by the sale of timber produced as a result of measures designed to safeguard, protect, reproduce forests in the framework of government order for the implementation of such measures without the sale of forest plantations for timber production, and timber produced as a result of use of forests situated in the lands belonging to the Forest Fund of the Russian Federation, in accordance with Articles 43-46 of the RF Forest Code; revenues generated by commodity intervention from the reserve stocks held in the federal intervention fund of agricultural products, raw materials and foodstuffs, revenues generated by the release of tangible assets from the state reserve, revenues generated by the involvement of convicts in reimbursable labor (in the part of sales of finished products), revenues generated by the sale of products requiring special storage conditions); this figure also includes revenues generated by (a) the sale of apartments, (b) the sale of property held by right of operative management by federal institutions (with the exception of autonomous institutions and budget-funded institutions (data for 2011-2018), less revenues generated by the activities of institutions situated abroad (2015-2018), (c) the sale of redundant movable and immovable military properties and other properties held by federal bodies of executive authority that involve military service, and services that are equated to military service, (d) the sale of the products of recycled armaments, military equipment and ammunition, (e) the sale of products intended for military use and entered on the list of properties held by federal bodies of executive authority in the framework
of cooperation in the field of military technologies (data for 2008 and the period 2010-2018), (f) the sale of scrapped armaments and other military hardware in the framework of the Federal Target Program of Industrial Recycling of Armaments and Military Equipment (2005-2010), (g) revenues generated by the sale of immovable property held by budget-funded and autonomous institutions (2014-2018), (h) revenues generated by the sale of other properties in federal ownership, and revenues generated by the sale of intangible assets (ITA); these are treated as federal budget revenues. Source: Laws on federal budget execution for the period 2000-2014; reports on federal budget execution as of January 1, 2016; January 1, 2017; and January 1, 2018 (annual data); and the monthly report on federal budget execution as of January 1, 2019, Report on Federal Budget Execution as of 1 January 2016 (annual report), www.roskazna.ru; own calculations.
When taken in absolute terms, the amount of property-generated federal budget revenues from non-renewable sources in 2018 jumped by 29 percent. However, the revenues generated by the sale of shares declined by 10.5 percent (to RUB 12.8 billion). Relative to the period after 2010, this would be a record low but for the index for 2015 (RUB 6.3 billion).
At the same time, the revenues generated by the sale of land plots moved in the other direction, rising more than 38 percent and amounting to RUB 1.66 billion vs. RUB 1.2 billion a year earlier, which roughly corresponds to their level in 2015, but is still less than the corresponding indices for 2014 and 2016. Meanwhile, the amount of revenues from the sale of miscellaneous properties jumped even higher (more than twice), and their index in absolute terms (RUB 13.8 billion) is a record high of the entire period since 2012. Similarly to the results of 2015, the relative share of revenue from that particular source turned out to be highest (approximately 1/2). The sale of shares accounted for more than 45 percent (in 2017 - approximately 2/3), and the sale of land plots - for less than 6 percent (in 2017 - 5.5 percent).
The aggregate federal budget revenue generated by the privatization (or sale) and use of state property in 2018 (Table 12) increased nearly 22 percent relative to the previous year.
Table 12
The structure of property-generated federal budget revenues from miscellaneous sources, 2000-2018
Year Aggregate revenue generated by privatization (or sale) and use of state property Privatization-generated revenues (non-renewable sources) Revenues generated by use of state property (renewable sources)
millions of rubles percent of total millions of rubles percent of total millions of rubles percent of total
1 2 3 4 5 6 7
2000 50,412.3 100.0 27,167.8 53.9 23,244.5 46.1
2001 39,549.8 100.0 10,307.9 26.1 29,241.9 73.9
2002 46,811.3 100.0 10,448.9 22.3 36,362.4 77.7
2003 135,338.7 100.0 94,077.6 69.5 41,261.1 30.5
2004 120,798.0 100.0 70,548.1 58.4 50,249.9 41.6
2005 97,357.4 100.0 41,254.2 42.4 56,103.2 57.6
2006 93,899.8 100.0 24,726.4 26.3 69,173.4 73.7
2007 105,761.25 100.0 25,429.4 24.0 80,331.85 76.0
2008 88,661.7 100.0 12,395.0 14.0 76,266.7 86.0
2009 36,393.7 100.0 4,544.1 12.5 31,849.6 87.5
2010 88,406.4 100.0 18,677.6 21.1 69,728.8 78.9
Cont'd
1 2 3 4 5 6 7
2011 240,964.1 100.0 136,660.1 56.7 104,304.0 43.3
2012 309,943.2/ 469,243.2* 100.0 80,978.7/ 240,278.7* 26.1/ 51.2* 228,964.5 73.9/ 48.8*
2013 209,114.85 100.0 55,288.6 26.4 153,826.25 73.6
2014 282,325.95 100.0 41,155.35 14.6 241,170.6 85.4
2015 303,975.2 100.0 18,604.1 6.1 285,371.1 93.9
2016 1,363,193.85/ 100.0 416,470.5 30.6/ 946,723.35/ 69.4/
670,798.85** 62.1** 254,328.35 37.9**
2017 297,074.9 100.0 21,906.7 7.4 275,168.2 92.6
2018 361,649.1 100.0 28,251.3 7.8 333,397.8 92.2
* - including the proceeds received by the RF Central Bank as a result of the sale of a stake in Sberbank (RUB 159.3 billion), which is probably an overestimation of the actual aggregate share of non-renewable sources, because the budget did not receive the full amount of those proceeds, but their amount less the balance sheet value of that particular asset plus the costs incurred in the deal of sale. Consequently, the share of renewable sources is, on the contrary, somewhat underestimated;
** - less the revenues generated by the sale of shares in Rosneft (RUB 692,395 billion) (less interim dividend payments).
Source: Laws on federal budget execution for the period 2000-2014; reports on federal budget execution as of January 1, 2016; January 1, 2017; and January 1, 2018 (annual reports); Report on Federal Budget Execution as of January 1, 2019 (monthly report), www.roskazna.ru; own calculations.
Their index in absolute terms (RUB 361.65 billion) was below only the records highs of 2012 and 2016, when the deals of sale of stakes in biggest companies (Sberbank and Rosneft) were closed1. Meanwhile, in 2018 there were no such deals, and the ratio of non-renewable to renewable sources in the structure of aggregate revenues generated by the privatization (or sale) and use of public property remained the same as a year earlier.
The relative share of non-renewable sources in the structure of aggregate revenues generated by the privatization (or sale) and use of public property was less than 8 percent. The revenue generated by the use of public property, having surged above 92 percent, in absolute terms hit a record high of the entire period since the early 2000s, while the revenues generated by the privatization and sale of property amounted to slightly more than a half of the corresponding index for 2013, at the same time being above the indices for 2007-2010 and 2015.
It should be noted that in the budget reports, the RF Central Bank's revenues generated by its stake in the capital of Sberbank of Russia PJSC are not identified as a separate entry; according to the materials attached to the drafts of federal budget laws prepared by the RF Government, these are treated as non-tax revenues.
6.1.5. The government program federal property management: new amendments (version) and current results
A condensed statement of the government policy in the sphere of property management in its current phase is the Government Program (GP) Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014, to
'When taken less the proceeds received by the RF Central Bank as a result of the sale of a stake in Sberbank, the index for 2012 moves below the aggregate federal budget revenue generated by the privatization (or sale) and use of public property in 2018.
replace the original GP with the same title that had been in effect for approximately 14 months1.
By RF Government Decree No 367-14 dated March 30, 2018, other important alterations were introduced in the program adopted in 2014, and it was approved in its new (third) version2.
The GP has been prolonged until 2020, while in its previous version it was to be completed in 2019, and so its second phase (2016-2020) is now extended over a period of 5 years. Below we analyze in more detail the changes in the volume of budget funding and its proportional distribution (Table 13).
Table 13
Budget allocations to the Government Program Federal Property Management in 2013-2020, millions of rubles
GP 2013* GP 2014 GP 2014
(original version) (version 2017/2018)
period total Including additional funding total Including under Subprogram Improvement of the Efficiency of Government Property Management and Privatization total Including under Subprogram Improvement of the Efficiency of Government Property Management and Privatization
2013 5,474.3 5,896.9 23,629.8 5,673.8 23,287.2 5,474.3
2014 5,251.4 9,666.6 22,093.5 5,436.1 22,093.5 5,436.1
2015 5,275.1 9,842.7 27,537.6 5,298.9 27,938.9 5,408.5
2016 5,469.8 11,180.5 25,261.0 5,138.9 24,854.5 4,465.8
2017 5,775.8 8,028.8 26,903.6 5,158.6 22,971.3 4,127.6
2018 6,192.0 7,869.2 29,605.5 5,531.4 22,491.1/23,047.6** 4,046.0/4,058.0
2019 22172.6/22621.5** 3991.6/4069.4
2020 22944.5** 4131.2
total 33,438.4 52,484.8 155,031.1 32,237.7 165,809.1/189,759.0** 32,949.8/37,170.8
* - only the amount of fUnding allocated to the Subprogram Improvement of the Efficiency of Government Property Management and Privatization. The budget allocation data for Subprogram Government Material Reserve Management are classified;
** - as approved in 2018.
Source: Government Program Federal Property Management, approved by RF Government Directive No 191-r dated February 16, 2013; Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (original version, as approved on March 31, 2017 and March 30, 2018).
After the amount of allocations to the implementation of the GP in its previous version was reduced by 15-24 percent in 2017-2018 relative to its original version, their
1 Approved by RF Government Directive No 191-r dated February 16, 2013. For more details on GP 2013, see Malginov, G., Radygin. A. Public sector and privatization // Russian Economy in 2012. Trends and Outlooks (Issue 34). Moscow, IEP. 2013, p. 468-475.
2 For an analysis of the GP as approved in spring 2017, see Malginov, G., Radygin. A. Federal property and privatization policy// Russian Economy in 2017. Trends and Outlooks. Moscow, IEP. 2018, p. 435452.
growth in accordance with the latest version amounted to 2-2.5 percent in 2018-2019. Overall in the course of 8 years (2013-2020), the volume of financial resources allocated from the federal budget to the implementation of the GP is to amount to RUB 189.8 billion, which is by approximately RUB 24 billion, or 14.5 percent, more than the amount envisaged in the previous version of the GP for a 7-year period (2013-2019).
The allocations under the GP, as a result of its prolongation, to Subprogram 1 Improvement of the Efficiency of Government Property Management and Privatization will amount to more than RUB 4.2 billion. The volume of funding earmarked for the 'extra' year 2020 is less, by approximately 11 percent, than the average annual volume of allocations envisaged in the new version of the GP (relative to the corresponding allocation target set in the previous version, it will decline by 12 percent, and relative to the original version - by approximately 23 percent). Similarly to the original version, the bulk of budget allocations will go to the Subprogram Government Material Reserve Management. The Subprogram Improvement of the Efficiency of Government Property Management and Privatization will receive less than 20 percent of the total allocation target for the period 2013-2020 (and approximately 18 percent in 2019-2020).
However, it should be borne in mind that throughout the entire discourse, it is the allocation targets, and not the actual amount of budget spending, that are the focus of attention. The corresponding budget projections in the law on federal budget for 20192021 turned out to be approximately 30 percent less than the targets set in the GP certificate: RUB 15.8 billion in 2019, and RUB 16.1 billion in 2020. At the same time, the amount of allocations to Subprogram 1 has turned out to be somewhat higher than the targets set in its certificate: RUB 4,092.5 million in 2019, and RUB 4,155.5 million in 2020. As a result, the relative share of the Subprogram Improvement of the Efficiency of Government Property Management and Privatization will amount to approximately 1/4 of the total amount of funding allocated to the GP.
While the goals that were previously set in the GP have remained unchanged, in its new version the targets and indicators of the GP's progress are the average rate of decline in the number of organizations with state stakes and federal treasury property entities (as percentage) - these remained unchanged, but in the original version of the GP there was also another indicator - the dynamics of the hi-tech development of federal property management methods.
The expected results, according to the new version of the GP, are the adoption, by 2020, of a new forecast plan (program) of federal property privatization and the main directions of federal property privatization for 2020-2022 (instead of the completion, in 2019, of the current reform in the system of federal property sales), and an increase in the rate of decline in the number of federal treasury property entities from 3 percent in 2013 to 29.5 percent in 2020 (instead of 24 percent in 2019).
The total number of quantitative targets set for the Subprogram Improvement of the Efficiency of Government Property Management and Privatization remained the same (14); in the original version adopted in 2014 there were 16 targets, and since then, their actual content has also changed.
Among the targets aiming at optimization of the composition and structure of federal property, the indicator of the relative share of treasury property entities for which a target function was assigned has been eliminated (with respect to FSUEs, this was done in 2017).
And instead of the indicator of decline in the number of treasury property entities (with the exception of entities in RF exclusive ownership), measured as a percentage of their number in 2012, the indicator of the relative share (percentage) of federal treasury property entities involved in economic turnover in the total number of federal treasury property entities as of the end of a reporting year is now applied (less land plots, shares in the charter (or share) capital of economic societies and partnerships, other highly valuable movable property entities with initial per unit cost below RUB 500,000/200,000, and current assets (irrespective of their value), entered on records as single entities)1.
Besides, a new indicator was introduced - the relative share (percentage) of the powers of Rosimushchestvo executed through the use of the Federal State Information System FGIAS ESUGI (Register of Assets Held by the Russian Federation). In this connection, it should be reminded that in the GP's original version adopted in 2014, there were two indicators linked to the use of FGIAS ESUGI: the relative share of economic societies with a 100-percent stake owned by the RF and state organization with a less-than-100-percent stake owned by the RF, whose accounting systems and tax records were fully integrated in FGIAS ESUGI, in the total number of organizations in the relevant category (both these indicators were eliminated in 2017).
The definition of the indicator of the amount of federal budget revenue generated by profit derived from the ownership of shares in the charter (or share) capital of economic societies and partnerships, or by dividends paid on shares in federal ownership, and actually received, relative to its target set for a given reporting year, was significantly altered so as to make it more precise. The original definition was supplied with a note that in this connection, a decision by the RF Government to the effect that dividends are not to be paid should be taken into account; now the content of that note has been expanded, and in addition to a government decision, also government directives concerning the percentage of net profit to be earmarked for the payment of dividends by each JSC, and concerning the difference between the actual amount of net profit received by a JSC and its planned target, should be taken into account.
The expected results of Subprogram 1 have largely remained the same, as far as their content is concerned. It differs from its 2017 version only in that it now lacks one specific target - a decline in the number of treasury property entities owned by the Russian Federation (less land plots). At the same time, with respect to all treasury property entities, land plots including, a general increase of the relative share of such
'Because this definition is obviously difficult to apply due to its complexity, in the materials published on Rosimushchestvo's official website, its shorter version sometimes used: 'treasury-owned capital construction entities not involved in economic turnover'.
entities involved in economic turnover is proclaimed (without any specific figures provided).
The text of the GP was amended as follows.
The government policy priorities and goals, which have been shaped not only by the Concept of long-term socioeconomic development of Russia until 2020 (approved by RF Government Directive No 1662-r dated November 17, 2008) and the Federal Law 'On Strategic Planning in the Russian Federation', but also by presidential and governmental decisions, are now concretized, to some extent, by the following elaboration: 'including with respect to accelerated development of priority territories'.
The list of measures designed to improve the efficiency of federal property sales and to enhance the involvement of federal property entities in commercial turnover, including privatization instruments, has been shortened.
The following items were struck off the list:
- creation of mechanisms for elaborating plans and schedules regarding the sale of shares in big companies with state stakes in a medium-term perspective, prepared with due regard for the results of a preliminary analysis of their investment potential, markets, demand, investor needs, regulatory environment; and also, whenever necessary, implementation of measures designed to increase the capitalization index and investment attractiveness of the property entities to be alienated; alteration of the business model, strategy and corporate governance quality of companies, and the tariffand tax-related and social aspects of regulation;
- implementation of a system of motivations for the key participants in a sale (the CEOs of a company earmarked for privatization and the seller);
- elaboration, with due regard for international best practices, of formal procedures of pre-sale preparation and alienation of shares in big companies with state stakes that could be attractive for investors, in accordance with RF Government decisions, in order to attract investments, and promote competition, modernization and technological development of the national economy;
- regular monitoring of the planning, preparation and closure of deals entered in the federal property roadmaps approved by the RF Government;
- better information backing of sales of federal property through regular online publications, and gradual elimination of printed announcements concerning the involvement in economic turnover of federal property entities;
- 'post-privatization' monitoring of the sold entities, and control of the fulfillment of their obligations by the new owners.
In this connection, the following goals related to optimizing the content and structure of the federal property complex are no longer to be achieved:
- creation of a system of motivations for the sellers and CEOs of companies with state stakes earmarked for privatization;
- creation of roadmaps for the pre-sale preparation and sale of big federal property entities that are attractive for investors;
- creation of a system for control and monitoring of the implementation of roadmaps for the pre-sale preparation and sale of big federal property entities that are attractive for investors;
- completion of the implementation of roadmaps for increasing the investment attractiveness of federal property entities to be alienated.
Some alterations were also made to the list of measures designed to boost performance in the sphere of federal property management.
There is no longer any mention of the requirement that the companies still with federal stakes should gradually go public through entering the organized securities market. At the same time, it is now required that professional directors and independent experts should be elected to the managerial and control bodies of biggest companies as well.
Besides, the text has been technically edited in many ways. Among the most important alterations are the use of the terms 'phase I' and 'phase II' instead of the specific dates mentioned in the previous version (2015 and 2019 versions respectively), and the equivalent use of the terms 'roadmap' and 'plan of measures'.
The new version of the GP, similarly to its predecessor, contains a number of annexes, the most interesting component of which are the numerical data (indicators). Their publication makes it possible not only to compare different versions, but also to estimate the success achieved in the program's implementation (Tables 14-18).
Table 14
The progress of the GP Federal Property Management in 2014-2017
and indicators for the period until 2020, in the part of determining target functions (relative share of assets with a determined target function)
Indicator 2014 2015 2016 2017 2018 2019 2020
plan fact plan fact plan fact plan fact
Relative share of economic societies with shares (or stakes) in federal ownership, percent 35 61 45 68 50 65.5 100 99.8 100 100 100
Relative share of FSIs, percent - 20.5 - 32 5 49 60 60.6 100 100 100
Source: Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (as approved on March 30, 2018); Rosimushchestvo's reports for 20142017, www.rosim.ru.
Table 15
The progress of the GP Federal Property Management in 2014-2017 and indicators for the period until 2020, in the part of optimization
of its content and structure
Indicator 2014 2015 2016 2017 2018 2019 2020
plan fact plan fact plan fact plan fact
1 2 3 4 5 6 7 8 9 10 11 12
Annual decline in number of JSCs with state stakes relative to previous year, not less than, percent 15 8.8 12 12 6 20.9 5 14.6 6 7 8
Cont'd
1 2 3 4 5 6 7 8 9 10 11 12
Annual decline in number of FSUEs relative to previous year, not less than, percent 12 6.3 13 12 15 9.7 20 22.2 13 13 13
Reduction in area of treasury-owned land plots not involved in economic turnover, relative to total area of treasury-owned land plots in 2012 (except land plots withdrawn from turnover or those subject to turnover restrictions), percent 10 21.5 15 17 20 33.9 25 35 30 35 40
Relative share of treasury property entities involved in economic turnover in total number of treasury property entities as of end of reporting year (less land plots, shares, stakes (or contributions) in charter (share) capital of economic societies and partnerships, other highly valuable movable property entities with initial per unit cost below RUB 500,000/200,000, and current assets (irrespective of their value), entered on records as single entities)*, percent 18 18.5 19
* - a new indicator that appeared in the 2018 version of the GP.
Source: Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (as approved on March 30, 2018); Rosimushchestvo's reports for 20142017, www.rosim.ru.
Table 16
The progress of the GP Federal Property Management in 2014-2017 and indicators for the period until 2020, in the part of public asset management instruments (in fact, only JSCs with state stakes)
Indicator 2014 2015 2016 2017 2018 2019 2020
plan fact plan fact plan fact plan fact
1 2 3 4 5 6 7 8 9 10 11 12
Relative share of civil servants
in managerial and controlling bodies of JSCs with state stakes, 30 29.6 30 27 30 28.7 50 495 50 50 50
percent
Cont'd
1
10
11
12
Relative share of JSCs (those entered in the Special List, and other JSCs with controlling RF stakes) with indicators in their long-term development programs oriented to boosting labor productivity and creation and modernization of high-productivity jobs, percent*
70
71.5
80
90
95
* - a new indicator that appeared in the 2017 version of the GP.
Source: Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (as approved on March 30, 2018); Rosimushchestvo's reports for 20142017, www.rosim.ru.
Table 17
The progress of the GP Federal Property Management in 2014-2017 and indicators for the period until 2020, in the part of hi-tech development of federal property management methods
Indicator 2014 2015 2016 2017 2018 2019 2020
plan fact plan fact plan fact plan fact
Relative share of federal property entities in Federal Property Register in total number of identified property entities to be entered in Register (over current year), percent 80 100 80 80 80 80.2 80 81.5 80 90 90
Relative share of public services rendered in electronic form in total number of services rendered by Rosimushchestvo, percent 35 98 50 98 65 93.3 100 100 100 100 100
Relative share of powers executed by Rosimushchestvo through the use FGIAS ESUGI, percent* 45 60 75
* - a new indicator that appeared in the 2018 version of the GP.
Source: Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (as approved on March 30, 2018); Rosimushchestvo's reports for 20142017, www.rosim.ru.
These data reliably underline the fact that after the adoption of a new version of the GP, according to the year-end results of 2017, almost all indicators were close to their target values, or had surged above those target values. One particularly illustrative example is the indicator of annual decline in the number of economic subjects with state stakes relative to the previous year. If for JSCs that movement pattern could be observed as early as 2016, in the case of FSUEs an accelerated rate was noted for the first time only since the launch of the GP. The rate of shrinkage of treasury-owned land plots not involved in economic turnover relative to the total area of treasury-owned land plots in 2012 corresponds to the planned target for 2019. In a similar fashion, the ratio of value of sold property entities in state ownership to their valuation index determined for the purpose of their sale also corresponds to its planned target for 2018. The budgetary effect
2
3
4
5
6
7
8
9
indicators rose above their planned targets: with respect to the sale of shares (or stakes) in economic societies - by 4 percent, and with respect to dividends - by more than 7 percent.
Table 18
The progress of the GP Federal Property Management in 2014-2017 and indicators for the period until 2020, in the part of budgetary effect
Indicator 2014 2015 2016 2017 2018 2019 2020
plan fact plan fact plan fact plan fact
Relative share of federal budget receipts over reporting year generated by sale of shares and stakes in charter capital of economic societies, as percentage of planned amount of receipts set in RF Government directive that approved forecast plan (program) of privatization for given year (except receipts generated by sale of shares in biggest JSCs),* percent - - - - - - 100 104 100 100 100
Federal budget revenue received as profit derived from stakes in charter capital of economic societies and partnerships, or dividends on shares in federal ownership, as percentage of planned target for reporting year (with due regard for RF Government concerning non-payment of dividends),* percent - - - - - - 100 107.1 100 100 100
Ratio of value of sold property in state ownership to its valuation for purposes of sale,* percent - - - - - - 30 40.5 40 50 70
* - a new indicator t iat appeared in t ie 2017 version of the GP.
Source: Government Program Federal Property Management, approved by RF Government Decree No 327 dated April 15, 2014 (as approved on March 30, 2018); Rosimushchestvo's reports for 20142017, www.rosim.ru.
In the new (2018) version of the GP, the content of the normative legal package to be adopted has been somewhat adjusted. While in the previous version it was intended to introduce amendments to two presidential executive orders (concerning constraints on privatization and the list of strategic organizations) and one federal law (concerning the procedures for determining heirs to property in the course of escheatment process), the new version envisages the adoption, by a government directive, of the privatization program for 2020-2022 and the amendment of the law on unitary enterprises
(concerning regulation of the sale of their property), and the issuance of a government
decree on the improvement of federal property records.
* * *
Thus, in 2018, the situation in the sphere of ownership relations was shaped by the following basic trends.
The number of unitary enterprises and JSCs with state stakes in their capital, according to data from a variety of sources, was well in line with the multi-year downward trend displayed by the movement pattern of the number of economic subjects in federal ownership. A detailed analysis revealed a number of negative trends like a shrinkage in the relative share of companies where the State, in its capacity of a shareholder, could exercise full-scale corporate control, as a result of an increase in the relative share of minority stakes, and also a shrinkage in the relative share of those companies where Rosimushchestvo could fully exercise its shareholder rights.
There were no instances of sale of big assets (included in the current privatization program for 2017-2019) on the basis of individual government decisions. The biggest deal with significant budgetary effect was the 2-year (2017-2018) installment buyout, under an individual plan, of a stake in a Russia-India joint venture in the telecommunications sector by SSA Sistema PJSC. However, the total budget target for revenue generated by the sale of shares proved to be unachievable, and the same was true of the federal budget revenue target (less biggest sale value) set in the privatization program. The movement patterns of sales of stakes in JSCs in accordance with standard procedures and reorganizations of unitary enterprises into JSCs remained basically the same as in 2017.
As for the sales of treasury property entities, both the number of bids by investors and the number of actually closed deals more than doubled. In this connection, we may speak of an increasingly significant involvement of independent sellers, who for several straight years have been playing a major role in the sales of shares (or stakes) in economic societies.
The provisions of the law on privatization were made significantly more liberal: the ban, introduced in 2017, on property purchase by an offshore company now applies only to those offshore companies which do not disclose information on their beneficiaries, beneficiary owners and controlling persons in the procedure established by the RF Government.
The process of creation, by the government, of vertically integrated structures and consolidation of state corporations has continued. The decision concerning the transfer to State Corporation Rostec of several VISs created more than 10 years ago, previously entered on the list of strategic organization, and specializing in certain industrial sectors, can be viewed as a new development in this sphere.
As far as state representatives in the managerial bodies of companies with state stakes are concerned, their group continued to display a trend toward an increasing relative
share of civil servants and professional attorneys and a shrinking share of independent directors. The improvement of instruments to be applied in managing the economic subjects operating in the public sector was reduced in the main to elaboration of various draft documents.
In the structure of federal budget revenue generated by privatization (or sale) and use of state-owned property, just as a year earlier, renewable sources played a dominating role. In 2018, as was the case both in 2015 and in 2017, their relative share hit a record high of the entire period since the early 2000s (more than 90 percent).
Meanwhile, most of revenue growth expressed in absolute terms came from the sources associated with the activity of commercial organization with state participation (dividends and the transfer of part of their profit by unitary enterprises), while lease payments for land and other property were stagnating or shrinking, with the exception of revenues generated by the leasing of treasury property entities. The latter, from the moment of their identification as a separate entry in budget reports, began to prevail in the aggregate proceeds of federal property leasing.
Among non-renewable revenue sources, growth was displayed by revenues generated by the sale of land plots and miscellaneous properties. The revenues generated by the latter were more substantial, even surging above the shrinking revenues from the sale of shares (or stakes) in economic societies.
The tradition of annual amendment of the Government Program Federal Property Management was continued. It was prolonged for one more year (until 2020), and the amount of funding allocated to both its subprograms was increased accordingly; however, the actual amount of these allocations is determined by laws on federal budget.
The major changes in the set of indicators for estimating the course of implementation of the Subprogram Improvement of the Efficiency of Government Property Management and Privatization had to do with treasury property entities; as was previously done with respect to unitary enterprises, the indicator for determining their target function was abolished, and the indicator of shrinkage of the 'non-land' component of the group of treasury property entities is now presented in a new format. The results of implementation of this Subprogram, after the alterations introduced in 2017, demonstrate that the established targets were met or exceeded by nearly all the indicators.
6.2. Megaregulatory approach to financial market regulation in abroad and in Russia1
6.2.1. Models of financial market regulation
One of the apparent aftermaths of the 2007-2009 global economic crisis was a lack of coordination between supervisory financial authorities. The previous general supervisory requirements had been found to be inadequate, raising a whole host of questions about its effectiveness. The 'too big to fail' issue came to the fore, while the
1 This section was written by N. Polezhajeva RANEPA; E. Apevalova from RANEPA.
antitrust regulation of mergers and acquisitions in the financial sector was ultimately thought to be too 'soft'. Stepping up the adoption of unified ("mega") financial regulators became an alternate solution to the problem.
A megaregulatory approach underlies the reforms that were undertaken in Austria, Germany, Denmark, Iceland, Norway, Singapore, Sweden, Japan.
The idea to establish megaregulators was originated by the need to optimize supervision costs, which, however, was most typical of small countries. Later, the dominant idea was the effort to supervise financial conglomerates on a consolidated basis. Amid the global crisis, however, the rationale is to mitigate the threat of systemic risks and to reduce moral hazard risks - such risks can arise out of a bank's failure to assume full responsibility for its actions thus shifting the responsibility to the state - to a minimum in the banking sector.
The idea to adopt a megaregulatory approach in Russia was first expressed in 1999 and revisited in 2006, but to no avail1. The President of the Russian Federation signed on July 26, 2013 a law whereby the responsibilities - legal regulation, control and supervision over financial markets, including insurance, micro-financing, rating agencies and investment of pension savings - vested in the disbanded Federal Service for Financial Markets (FSFM) will now be the remit of the Bank of Russia instead. The FSFM ceased to be deemed to be a legal entity on September 1, 2013, and the FSFM functions were handed over by early in 2015 to a previously established single financial regulator - the Bank of Russia2. This suggests that an authority was established in Russia within the frameworks of cross-sectoral model of financial regulation, in which the regulatory power is fully vested in a single regulatory authority (a megaregulatory approach).
All the pros and cons of the megaregulatory model have been assessed in detail3. The transition to an integrated regulatory approach underlined many financial regulatory reforms in recent two decades. The 1980s saw some countries adopt the above principle, namely Singapore (in 1984), Norway (in 1986) and Denmark (in 1988), the 1990s saw five more countries do the same, and the 21st century is seeing the process gain pace. In the meantime, a few countries have thus far managed to have two regulatory models interchanged: for example, the U.K. established a megaregulator in 2000, while it is now switching back to a twin peaks model.
The second - 'twinpeaks' - model is based on functional sharing of regulatory power between two "peaks". The former is commonly responsible for prudential supervision,
1 See Khandruev A.. Megaregulatorbound (October 26, 2012) // Economic Policy's official website. Expert channel. URL: http://ecpol.ru/index.php
2 See Bobkova E.S., Semenova E.V. Bank of Russia on the rise as financial market regulator (October 27, 2014). URL: http://novainfo.ru/article/2530
3 Doroshenko M.E., Berezin E.S. Megaregulatory approach in Russia amid financial crunch: Initial lessons // MSU (Moscow State University) Publications, Series 6. Economics. 2015. No. 4. PP. 30-51. Medvedeva O.E., Makshanova T.V. The advantages and disadvantages of establishing a megaregulator in Russia's financial market // TGU (Togliatti State University) Vektor Nauki. 2013. No. 3. PP. 353356.
while the latter is responsible for protecting rights of financial service consumers1. This type of model is adopted in the U.K., Australia and The Netherlands. The pros and cons of the twin peaks model are presented in Table 19.
Table 19
Pros and cons of twin peaks model2
Pros: Cons:
- financial conglomerates are supervised on a consolidated basis; - monitoring of the financial system as a whole needs less time to be spent on identifying systemic risk threats; - a unified approach to various types of financial mediators makes regulatory arbitrage less likely; - cost optimization of supervisory processes. - supervision efficiency losses during a transition period; - salient features of specific sectors of financial intermediation are ignored; - a bureaucratic approach to decision making, and "delayed feedback"; - cost saving can be overestimated.
The third - sectoral (vertical) - model includes more than one regulators, each of them is responsible for a particular sector. This type of model is now in place in Hong Kong, China, Mexico.
The sectoral model can usefully and efficiently regulate various financial market segments according to their salient features, however, coherence in actions of regulatory authorities is not always a success. Some European countries (Belgium, Poland, Slovakia, Czech Republic) have in recent decade opted against employing the sectoral model. The model has disadvantages, including high regulation and supervision costs.
Some authors identify a fourth - hybrid (functional) - model that assumes the presence of a single regulatory and supervisory authority to supervise more than one financial market sectors or stand-alone functional authorities (for example, a dedicated financial services consumer protection agency). This type of model, according to the authors, is in place in the United States, France, Italy, Brazil, Spain3, however, the foregoing countries' models of financial market regulation are most often regarded as akin to the 'twin peaks' model.
According to data from the IMF, 27 (or 38.5 percent) of the 70 countries that underwent reforms in 1998-2009 undertook some form of financial regulation and supervision.
There are two principal approaches to financial market regulation. One of them focuses on alleviating the systemic risk problem, while the other focuses on business conduct in the financial market4.
1 See Abramov A.E., Radygin A.D., Chernova M.I. Regulation of financial markets: Models, evolution, effectiveness // Voprosy Ekonomiki. 2014. No. 2. PP. 33-49.
2 See Khandruev A. Searching for sound mega-regulation (November 29, 2012). URL: https://bosfera.ru/bo/v-poiskah-zdravogo-megaregulirovaniya
3 See Konstantinov A.V. Foreign countries' financial regulation in theory and in practice and its application in the Russian context // Fundamentalnye Issledovaniya. 2014. No. 9 (Part 2). P. 394; Buklemeshev O.V., Danilov Y.A. Efficient financial regulation and establishment of a megaregulator in Russia // The Journal of the New Economic Association. 2013. No. 3 (19). P. 82.
4 See Konstantinov A.V. Foreign countries' financial regulation in theory and in practice and its application in the Russian context // Fundamentalnye Issledovaniya. 2014. No. 9 (Part 2). PP. 394-398.
We will now examine initial outputs and ways to improve a single megaregulatory model in abroad (the U.K., Germany, Japan, and Singapore) and in Russia.
6.2.2. The United Kingdom: A roundtrip from twin peaks to megaregulatory approach
The United Kingdom has one of the world's largest financial markets that serves as a benchmark to many other nations. The British history of market regulation has a relatively short period (of about 15 years) of employing a megaregulatory model which was subsequently replaced by the previously discredited 'twin peaks' model. A study of the U.K. experience enables one to indentify disadvantages of the single regulator approach that turned out to be less efficient than far from perfect regulators of the twin peaks model.
The twin peaks model prevailed in the U.K. financial market for more than three centuries until the transition to a megaregulatory approach.
The Bank of England (established in 1694) used to be a center for financial markets regulation, acting in the capacity of self-regulatory banking organization. The Bank was officially empowered by the Banking Act 1979 to perform regulatory and supervisory functions in the banking sector.
A Securities and Investment Board (SIB) was established in 1986 under the Financial Services Act 1986, whereby the SIB is to supervise, under the surveillance of Her Majesty's Treasury (the Treasury), self-regulatory organizations that regulate and control non-bank financial firms. The Bank of England and the SIB taken altogether represented the 'twin peaks' model of financial market regulation.
The effectiveness of the twin peaks model was put in doubt in the 1990s. The financial scandal surrounding the Bank of Credit and Commerce International (BCCI) and the bankruptcy of the Barings Bank highlighted the fact that the British regulatory structure was weak when it comes to supervision of international banks and internal control systems employed by regulated firms. Furthermore, the European Union required its member-states to ensure their central banks are independent.
In the end, in 1997 self-regulatory organizations operating in the financial market were integrated into the SIB renamed as the Financial Services Authority (FSA) vested with the power (which the Bank of England was stripped of) to supervise the banking sector, with the Bank of England remaining the lender of last resort. The independent status of the Bank of England was enacted by the Bank of England Act 1998. The independent single financial regulator status of the FSA was enacted by the Financial Services and the Market Act 20001. For instance, a megaregulatory approach to financial market regulation was adopted instead of that of twin peaks.
The British megaregulatory approach was described as tripartite regime, including the Treasury (vested with the power to exercise overall statutory regulation and
1 See hereinafter Bando H. Single Regulator or Twin Peaks, The Different Regulatory Approach by UK, Switzerland and Japan (May 1, 2014). 150 Years Anniversary Yearbook, 2014. PP. 74-87. URL: https://ssrn.com/abstract=2876022.
decision-making, disposal of budget funds in a crisis), the Bank of England (responsible for ensuring that the payment system is functional and the financial system is stable1), the FSA and a principle-based approach to regulation.
In 1997, the Treasury, the Bank of England and the FSA shared the responsibility for financial stability in the country by signing the Memorandum of Understanding 1997, but failed to identify which of them is to be responsible for monitoring systemic risks in the financial market.
Under the Financial Services and Markets Act 2000, the FSA had an exclusive right to policy-making and focused primarily on principles. The principle-based approach is distinguished by its fast-response and flexible regulation style. The FSA developed Principles for Businesses that are to be enforceable if failed to be observed.
It appeared that the FSA was performing so good that other countries (for example, Germany, Japan) started emulating the British model of financial regulation2. On the verge of the global financial crisis 2008, the British megaregulatory approach was often cited "as a model of an efficient and effective regulator, not only because of its streamlined model of regulation, but also because it adheres to a series of "principles of good regulation," which center on efficiency and economy the role of management, proportionality, innovation, the international character of financial services, and competition. This overlay of pragmatic business principles, in addition to the traditional goals of regulation, has been a distinguishing feature of the U.K. regulatory approach"3.
However, the global financial crunch (2007-2009) - caused by, among other things, substandard lending in the United States and proliferated swiftly via securitized financial products, thus leading to the collapse of some well-known British banks, such as the Northern Rock Bank, the Halifax Bank of Scotland (HBOS) and the Royal Bank of Scotland (RBS) - revealed serious faults and multiple failures on the part of the British megaregulator. The delegation of the Bank of England's banking regulation and control powers to the FSA, which is not supposed to act as the lender of last resort, coupled with the inability of the Treasury, the Bank of England and the FSA to act in concert came into play.
The bankruptcy of the Northern Rock Bank was, first of all, due to excessive mortgage products and lending against a backdrop of inadequate liquidity. The government decided to allocate government funds to bailout the banking sector. The Northern Rock Bank case revealed the drawbacks of the financial stability.
The HBOS ranked one of Britain's top-4 largest banks until it collapsed in 2009, so the HBOS collapse posed a systemic risk to the national economy. The collapse also
1 See Batsura M.S. International practice of establishing and operating the megaregulatory institution as illustrated by the United Kingdom and Germany // Finansovoye Pravo. 2015. No. 5. P. 28.
2 See Wymeersch E. The Structure of Financial Supervision in Europe: About Single Financial Supervisors, Twin Peaks and Multiple Financial Supervisors // European Business Organization Law Review. 2007. No. 8(2). P. 237-306.
3 Group of Thirty. The Structure of Financial Supervision. Approaches and Challenges in a Global Marketplace (2008). PP. 28, 29. URL: http://group30.org/images/uploads/publications/ G30_StructureFinancialSupervision2008.pdf
suggested that the British megaregulatory approach was a weak approach. "The FSA was not so much the dog that did not bark as a dog barking up the wrong tree"1.
The requirements of the Basel II framework (2004) - a document of the Basel Committee on Banking Supervision that contains methodological recommendations for banking regulation, with the principal aim to enhance the quality of risk management in the banking sector in order to strengthen the financial system as a whole - weakened controls on capital adequacy by allowing banks calculate their own risk-weightings, distracted supervisors from concerns about lending and asset quality. It was not until late in 2007 that FSA attempted to raise concerns on these problems.
The HBOS brought back the return on equity (ROE) to a high level through aggressive lending at more than 20 percent. In 2002, the HBOS Corporate Division posted an increase in assets, that is, a 26 percent rise in loans for borrowers. However, such a rapid growth in assets was at odds with traditional customer deposits, and the HBOS had to resort to short-term wholesale markets in order to bridge the funding gap. The HBOS failed to heed the FSA's concerns about funding strategy because it treated FSA's activities as intrusion into its own territory rather than independent management that could secure the bank against mistaken courses of action. The FSA responded by simply raising bank capital requirements by 0.5 percent in 2003. In 2009, on the heels of the global financial crisis, the HBOS could no longer increase capital in the wholesale market. A decision was made to acquire the HBOS by Lloyds TSB Bank. The 350-year old Bank ceased to exist, and the HBOS Corporate Division's credits worth GBR 25 billion were impaired2.
The acquisition of ABN Amro by the RBS in 2007, which triggered the collapse of the latter, also showcased that the FSA was shortsighted, overlooking "metastases" of the global financial crisis. The FSA opted against interfering with the RBS' business, which was not aligned with best practices because the business "was not beyond the bounds of reasonableness", and interference in that case "would raise serious issues of unfairness"3. The FSA attempted to excuse itself, citing insufficient information and number of meetings with the RBS, although 551 meetings were held over 3.5 years alone, thus substantiating the fact that the FSA is a bureaucratic body in essence.
The regulator also overlooked a manipulation with the London Interbank Offered Rate (LIBOR) by the Barclays Bank while having a busy time gathering information and doing other bureaucratic activities instead of exploring thoroughly areas that are
1 House of Lords, House of Commons. Fourth Report of Session 2012-13. «An accident waiting to happen»: The failure of HBOS (April 4, 2013). P. 28. URL: https://www.publications.parliament.uk/ pa/jt201213/jtselect/jtpcbs/144/144.pdf
2 See Schmulow A.D. Approaches to Financial System Regulation: An International Comparative Survey (January 27, 2015). CIFR Paper No. 53/2015. P. 19-20. URL: https://ssrn.com/abstract=2556545
3 Financial Services Authority. Financial Services Authority Board Report. The failure of the Royal Bank of Scotland (December, 2011). P. 31. URL: https://www.fca.org.uk/publication/corporate/fsa-rbs.pdf
indeed exposed to risks. The FSA showed itself "a regulator asleep at the wheel", failing to weather the crisis and systemic weaknesses1.
The Financial Services Agency described its approach to regulation, sometimes known as "light touch", in the following manner: (1) markets are overall self-regulatory markets, the market discipline is a more efficient tool to employ than regulation and oversight, (2) the ultimate responsibility for risk management rests with senior managers and a board of private firms, (3) consumers are best protected by ensuring that wholesale markets are free and transparent rather than through regulation of products and overt market interventions.
The above philosophy had ultimately led to the following results: (1) Attention focuses on overseeing particular institutions rather than on the system as a whole; (2) Attention focuses on indentifying correctly systems and processes rather than on complex business models and strategies; (3) Attention focuses on supervising how the FSA screens "approved persons" for previous misconduct2 rather than on assessing technical skills; (4) Attention focuses on stimulating the doing-business regulation rather than on the balance between the doing-business regulation and prudential regulation. The FSA spent, albeit unintentionally, 70 percent of its time on doing-business regulation3.
A proposition was made in 2010 to rescind the tripartite regime with the FSA and to restore the regulatory and supervisory body headed by the Bank of England. "Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments... And, because central banks are the lenders of last resort, the experience of the crisis has also shown that they need to be familiar with every aspect of the institutions that they may have to support. So they must also be responsible for day-to-day micro-prudential regulation as well"4.
The Financial Services Act 2012 was put in force on April 1, 2013, whereby a twin peaks model of financial market regulation that was distinguished from the previously employed version of the model by enhanced role of the Bank of England was established in the U.K.
The above Act introduced amendments to the Bank of England Act 1998 and the Financial Services and Markets Act 2000, whereby three regulatory bodies were established, namely a Financial Policy Committee (FPC), a Prudential Regulatory
1 See Schmulow A.D. Spec. work. PP. 22-25.
2 Persons the FSA has approved to fulfill certain duties or "controlled functions" like, for example, account management.
3 See Ferran E. The Break-Up of the Financial Services Authority (October 11, 2010). University of Cambridge Faculty of Law Research Paper Series No. 10/04. P. 4. URL: https://ssrn.com/abstract=1690523
4 See HM Treasury. Speech by the Chancellor of the Exchequer, RT Hon George Osborne MP, at Mansion House. (June 16, 2010). URL: https://www.gov.uk/government/speeches/speech-by-the-chancellor-of-the-exchequer-rt-hon-george-osborne-mp-at-mansion-house
Authority (PRA) and a Financial Conduct Authority (FCA). The PRA and the FCA represent the two "peaks" sharing the FSA functions in the new regulatory model.
The FPC was established in the Bank of England as a macro-prudential regulator headed by the Governor of the Bank of England, with primary responsibility for supervising the system in order to maintain financial stability. The PRA was established as a subsidiary of the Bank of England, with primary responsibility for micro-prudential regulation, where the Chairperson is the Governor of the Bank of England and the Chief Executive is the Deputy Governor of the Bank of England. The FCA - the renamed FSA - is a regulatory autorityoutside the Bank of England with primary responsibility for conduct regulation, where the Chairperson and the Chief Executive are designated by the Treasury. The FCA is also responsible for micro-prudential supervision of the system in order to prevent non-systemic risks.
The Chief Executives of the PRA and the FCA are FPC voting members, whereas representatives of the Treasury are FPC non-voting members, however, the Treasury together with the FPC is involved in developing the financial stability strategy. The FPC is entitled to issue financial stability orders to the PRA and the FCA. The duties of the Treasury and the role of the FPC are well defined in order to avoid the problems inherent in the former tripartite regime. By controlling the FPC and the PRA, the Bank of England is responsible for macro-prudential and micro-prudential regulation. The FCA remains sole responsible for conduct regulation and for prudential regulation of areas under control (broker dealers, investment companies, etc).
The FPC, PRA and FCA have responsibilities that overlap each other. The FCA is responsible for institutions falling outside the scope of PRA regulation, being independent from the FPC and the PRA when it comes to decision-making. Furthermore, while assuming the primary responsibility for non-systemic institutions, the FCA is also responsible for institutions operating in the investment sector and for banks and investment banks1.
The Financial Services Act 2012 introduced amendments to regulatory goals. The FSA's regulatory goals were to maintain confidence in the market, public outreach, protect consumers rights and reduce financial crimes. Under the foregoing Act, the FCA has the following goals: to protect consumers' interests, maintain competition and financial system integrity. The latter includes sustainability, stability and resiliency; non-use for financial crime; avoiding the influence of a conduct that is deemed to be equal to market abuse; proper operation of financial markets; transparency of pricing in the markets.
The new regulatory system is a judgment-based system as opposed to the previous principle-based approach to regulation. Instead of calculating risk-weightings by following a series of established principles, new regulators must ensure that problems
1 See Ojo M. From Integrated Financial Services Supervision to the Twin Peaks Model: The Future of Financial Regulation and the Role of the Basel Capital Framework (July 20, 2016). IGI Global Publications, Forthcoming. P. 3. URL: https://ssrn.com/abstract=2812431
are addressed in advance as they think fit. This approach, however, is a subjective approach and subject to political and market pressure.
In contrast to the megaregulatory approach, the twin peaks model seeks to protect the system against potential conflicts of interests between the monitoring of financial institutions' solvency soundness and the supervision of rules of conduct and market integrity. While the prudential supervision rests with the central bank, the twin peaks model contributes to stable financial system by ensuring there is a proper coordination between the liquidity management in the banking sector (this function is inherent to a central bank) and the monitoring of credit institutions' solvency soundness (this responsibility rests with prudential oversight)1.
Summing up, the 'twin peaks' model of financial market regulation had been in place for a long time in the U.K. until the country adopted a megaregulatory approach. The switch to the megaregulatory approach was primarily due to ill-coordinated activities undertaken by regulators, which ultimately led to a series of high-profile financial scandals. The reversion to the twin peaks model, regardless of its drawbacks, some of which had been left unattended by the new version of the model, suggests that the British megaregulatory experience has been found even more unfortunate.
In the U.K., the regulatory power over financial markets was concentrated in the FSA, not a central bank. During the global financial crisis the Bank of England, stripped of its banking regulation and supervision power, failed to exercise in a proper manner the function of lender of last resort because of ill-organized interaction between the megaregulator and the Bank of England.
The British megaregulatory model was distinguished by excessive regulation/ bureaucratism and softness. The regulatory approach was, on the one hand, an objective approach free from external influence, but, on the other hand, failed to consider details and to address problems in a prompt manner. Bureaucratism in its turn distracted supervisors from addressing fundamental challenges. Financial markets were to a great extent left to their own devices, the responsibility for risk management was shifted to market participants. The FSA supervised particular institutions rather than the system as a whole, regulated doing-business, while paid less attention to the prudential regulation.
The megaregulatory approach in the U.K., which gave plenty of rope to financial market participants, could have lasted for longer, had it not been for the 2008 crisis. It appears that the establishment of megaregulator on the basis of the Bank of England would have given the opportunity to not only weather the crisis but facilitate the financial market regulation which is immune from the majority of the above listed drawbacks. In fact, the country opted to follow the same path in adopting the twin peaks model and provided an opportunity for the Bank of England to control both regulators. Note that each model of financial market regulation has several versions, and the drawbacks of the British megaregulatory approach are not necessarily inherent to single regulators of other countries.
1 See Ojo M. Spec. work. P. 2.
6.2.3. Germany: An independent and formally single regulator
Germany has one of the world's leading financial markets. Germany is one of a handful countries with big financial markets, employing a single financial regulator model; Germany has indeed been successful in doing this since 2002. However, the German megaregulatory approach is distinguished from the generally accepted understanding of the model.
Germany switched in 2002 from a model of financial market regulation, involving more than one regulator, to a megaregulatory approach by establishing, under the German Financial Services and Integration Act (German: Gesetz über die integrierte Finanzdienstleistungsaufsicht), a Federal Financial Supervisory Authority (German: Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin).
The BaFin is primarily responsible for ensuring a stable national financial system. To accomplish this task, the megaregulator issues licenses; supervises the banking and insurance sectors, the security market and asset management; takes remedial actions against credit institutions. In the intersectoral area, the BaFin is responsible for keeping track of financial market development trends, including some of its segments; protecting depositor, investor and consumer rights in the financial service market, etc1.
The Federal Financial Supervisory Authority was established through integration of former regulators of the Federal Banking Supervisory Office (German: Bundesaufsichtsamt für das Kreditwesen or BaKred), the Federal Insurance Supervisory Office (German: Bundesaufsichtsamt für das Versicherungswesen or BaV) and the Federal Securities Supervisory Office (German: Bundesaufsichtsamt für den Wertpapierhandel or BaWe).
The BaWe used to operate with each of the 16 German states (lands), the Deutsche Bundesbank and the BaKred. The BaKred and the BaWe shared responsibility with regard to institutions involved in banking and securities-related services. The BaKred was responsible for supervising of institutions' economic well-being, while the BaWe was responsible for monitoring operations with securities. The BaKred and the BaWe used to issue joint statements and directives. The cooperation at the state level with stock exchange regulatory authorities was maintained via the Working Committee of the States on Securities and Exchange-Related Issues (German: Länderarbeitskreis Börsenwesen)2.
1 See Popkova L.A. Protecting rights of financial market participants as a new function of the Bank of Russia // Bankovskoje Pravo. 2014. No. 2. P. 67; Rozhdestvenskaya T.E. Establishing megaregulatora in Russia: Goals, objectives, problems and development prospects // Bankovskoje Pravo. 2013. No. 5. PP. 10, 11.
2 See hereinafter Brown E.F. Consolidated Financial Regulation: Six National Case Studies and the Experience of the European Union (April 20, 2015). PP. 58-63. URL: https://www.volckeralliance.org/ sites/default/files/attachments/Background%20Paper%202_Consolidated%20Financial%20Regulation %20-%20Six%20National%20Case%20Studies%20and%20the%20Experience%20of%20the% 20European%20Union.pdf
The BaFin megaregulator was established primarily due to changes in financial markets, where market participants started offering complex (compound) products to their customers. Some supervisory authorities failed to meet new market conditions.
Another reason for the establishment of the BaFin was criticism by many nations that considered the existing German capital market supervisory framework as inefficient; and foreign investment companies and private investors were therefore reluctant to invest in Germany's projects1.
The establishment of the BaFin was meant to strengthen Germany's position in the international community and in the European market as well as ensure a more efficient interaction and a stable financial system across Europe. At the micro- and macro-levels, the BaFin has been more successful than its predecessors in reacting to and preventing economic crises. The BaFin seeks to enhance financial markets transparency in order to increase their reliability.
The BaFin is managed by its Executive Board, consisting of the President and five Chief Executive Directors. Each director is responsible for supervising one of the five existing directorates. The above type of structure is designed to prevent concentration of power in the BaFin.
The BaFin's power is governed by laws and regulations that previously governed the BaKred, the BaV and the BaWe.
The Securities Supervision Directorate is governed by the German Securities Trading Act (WpHG), the German Securities Acquisition and Takeover Act (WpÜG). The BaFin does not have full regulatory power because the German states continue to control particular stock exchanges.
The Insurance Directorate is governed by the German Act on the Supervision of Insurance Undertakings. The BaFin supervises public insurance undertakings with substantial economic impact that are involved in cross-border business between the German states. The German states are responsible for supervising public insurance undertakings with a smaller economic impact that operate within the states' boundaries. On top of private insurance the BaFin supervises Germany's pension system. The BaFin is entitled to approve all business requirements for insurers.
The Banking Supervision Directorate is governed by the German banking law. The Deutsche Bundesbank has always been playing an important part in controlling banks, and continues to do it in cooperation with the BaFin.
Additionally, there are eight authorities that support the BaFin in the performance of its functions, namely the Administrative Council, the Advisory Board, the Consumer Advisory Council, the Financial Stability Committee, the Insurance Advisory Council, the Securities Council, the Advisory Council and the Objections Committee. The Administrative Council comprises 17 voting members. The Council monitors the management of the BaFin and supports the BaFin in the performance of its supervisory functions. In addition, the Council is responsible for decision making on the BaFin
1 Batsura M.S.. Foreign experience in establishing and managing a megaregulator institution: The U.K. and Germany case-studies // Finansovoye Pravo. 2015. No. 5. P. 29.
budget. Members of the Administrative Council ought to meet certain minimum standards.
The Federal Financial Supervisory Authority is funded through fees and contributions from regulated firms and does not depend on the federal budget. The Authority can charge fees for its official acts. The BaFin is also paid for banking-related actions, for example, audit, as set forth in the German banking act. If fees and contributions are insufficient to cover costs, the BaFin may share costs on a pro rata basis between financial institutions, asset managers, investment joint-stock corporations, payment institutions, insurance undertakings, credit institutions and between specific additional types of companies.
German's single financial regulator is not an all-round regulator because the Deutsche Bundesbank still has some of the banking supervisory powers. The Deutsche Bundesbank, in close cooperation with the BaFin, plays an important part in supervising banks' day-to-day operations. In 2013, the BaFin and the Deutsche Bundesbank developed a Supervision Guideline1 as an attachment to the German Banking Act in order to delimit their duties, avoid duplication of functions, and enhance transparency. The monitoring function was handed over to the Deutsche Bundesbank, including fact finding, analysis of obtained and collected information, current and potential risk-weighting based on the information and audit findings evaluation. Despite the fact that the Deutsche Bundesbank is vested with the power to evaluate regulated entities, the ultimate decision on all regulatory and interpretation issues rests with the BaFin. When adopting decisions, the BaFin shall heed advice of the Deutsche Bundesbank2.
With the introduction of the euro currency, the Deutsche Bundesbank was stripped of the monetary-policy control power and is now responsible for maintaining a stable eurozone. The Deutsche Bundesbank acts as banking supervisor and oversees the implementation of European Central Bank's directives in order to avoid a financial crisis.
A point to note is that following the 2008 global financial crisis, Germany considered ways of reforming the German financial market regulatory framework, including delegating the BaFin's power to the Deutsche Bundesbank, which should have made the latter a full-fledged single regulator. The German government, however, renounced the idea because the BaFin had been overall successful in weathering the crisis and its aftermaths.
The Federal Financial Supervisory Authority is an independent authority accountable to the German Finance Ministry which is politically responsible for activities undertaken by the BaFin and involved in public oversight to make sure that BaFin's administrative actions are valid and reasonable. The Federal Ministry of Finance (Germany) is entitled to adopt laws and regulations and directives binding on the BaFin, take disciplinary
1 URL: https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Richtlinie/rl_130521_ aufsichtsrichtlinie_en.html
2 See Schmulow A.D. Approaches to Financial System Regulation: An International Comparative Survey (January 27, 2015). CIFR Paper No. 53/2015. P. 15-17. URL: https://ssrn.com/abstract=2556545
actions against megaregulator's personnel, request the megaregulator to submit information and explanations1.
In addition, during the 2008 financial crisis, a German Federal Financial Markets Stabilization Agency (German: Bundesanstalt für Finanzmarktstabilisierung or FMSA) was established within the financial regulatory framework, with the aim to rescue German banks faced with financial difficulty. The FMSA manages the Financial Market Stabilization Fund (German: Finanzmarktstabilisierungsfonds or SoFFIn) and, since 2011, the Restructuring Fund (German: Restrukturierungsfonds).
Germany also has other entities that are involved in financial regulation, including, for example, six various organizations that offer deposit insurance through the private Association of German Banks (German: Bundesverband deutscher Banken or BdB). Various types of social insurance, including health insurance, are regulated by the German Federal Insurance Office (German: Bundesversicherungsamt).
The German states have financial regulatory authorities supervise stock exchange and particular types of insurance services. At present, 9 of the 16 German states have local stock exchanges. Each of the 9 German states has a local trade supervisory authority. The German states are also responsible for supervising public insurance undertakings with a smaller economic impact than that of companies regulated by the BaFin.
Thus, an independent authority acts in the capacity of single megaregulator although German's financial system relies on banks. The Deutsche Bundesbank is involved in financial market regulation.
German's megaregulatory approach is, for the most part, a formal approach.
First, the main reason why Germany adopted a megaregulatory model was that the institutional regulatory model failed to fit into a new context of integrated financial markets. However, the existing German model of financial market regulation remains essentially a sectoral model because directorates affiliated with the BaFin megaregulator continue to be highly independent.
Second, the BaFin is not an all-round single regulator of financial markets because the system has other, smaller regulators (Deutsche Bundesbank, FMSA, etc). That is why the German version of megaregulatory approach is also known as a hybrid single regulator model2.
The fact that the BaFin directorates are located in various cities - in Bonn and in Frankfurt - does not contribute to consolidation of regulation.
A certain discrepancy between the form and the substance has, nonetheless, no effect on the regulatory efficiency. With the establishment of the BaFin, Germany
1 See Uzdenov S.S. Revisiting the establishment of financial megaregulator in Russia // Yurist. 2013. No. 20. P. 3.
2 See Brown E.F. Consolidated Financial Regulation: Six National Case Studies and the Experience of the European Union (April 20, 2015). PP. 58-63. URL: https://www.volckeralliance.org/sites/default/ files/attachments/Background%20Paper%202_Consolidated%20Financial%20Regulation%20-%20Six%20National%20Case%20Studies%20and%20the%20Experience%20of%20the%20European %20Union.pdf
strengthened its positions in the international community. The existence of several regulators and BaFin's accountability to the Finance Ministry contributed to avoiding concentration of power in the BaFin, and a well-organized coordination between them contributed to a robust functioning of the national financial system and minimization of systemic risks.
6.2.4. Japan: a "dedicated" dependent single regulator
Japan's model of financial market regulation has been in place since 2000. The model was introduced through efforts of searching for an alternative to inefficient financial regulation on the part of Japan's Finance Ministry. However, despite good performance figures, the architecture of the existing single megaregulator remains imperfect, prone to concentration of power and political pressure.
Japan moved to a megaregulatory approach to its financial market as a result of financial reform, also known as "Japan's Big Bang", in the late 1990s. The reform was undertaken due to complaints against the Finance Ministry's financial markets regulation until 1998 (the emphasis was placed on, above all, corruption and incompetence). The Finance Ministry's failure to ensure efficient monitoring of financial institutions had triggered bankruptcy of some of the largest financial institutions ("jusen"1, two credit cooperatives, Hyogo Bank, Kizu and Cosmo credit unions)2.
The reform was intended to liberalize Japan's financial market and to strengthen financial stability. In view of this the Bank of Japan Act 1998 was adopted, whereby Japan's central bank was made independent from the Finance Ministry. Under the Act, the Bank of Japan was made responsible for monetary policy and was tasked to establish a Financial Supervisory Agency, the predecessor of the today's single megaregulator in Japan's financial market - The Financial Services Agency (Financial Services Agency or FSA).
Under the Financial Services Agency Act 1997, Japan's Finance Ministry was stripped of the Banking Bureau and Insurance Bureau in 1998 in order to establish a Financial Supervisory Agency. The Securities Exchange Surveillance Commission (SESC) affiliated with the Finance Ministry was also made part of the Financial Supervisory Agency. Control over the Financial System Planning Bureau was handed
1 Non-bank financial institutions in Japan that were established in the 1970s as subsidiaries of banks that made mortgage loans. Excessive lending by jusen in the 1980s contributed to a "bubble" in Japan's real estate market. Several jusen received bailouts in the 1990s but they nevertheless ceased operations by 1996.
2 See hereinafter: Brown E.F. Consolidated Financial Regulation: Six National Case Studies and the Experience of the European Union (April 20, 2015). PP. 64-69. URL: https://www.volckeralliance.org/ sites/default/files/attachments/Background%20Paper%202_Consolidated%20Financial%20Regulation %20-%20Six%20National%20Case%20Studies%20and%20the%20Experience%20of%20the%20 European%20Union.pdf
over in 2000 from the Finance Ministry to the Financial Supervisory Agency with the aim to establish the FSA.
The Financial Supervisory Agency received not only the Finance Ministry's financial supervisory power, but also the power vested in other public authorities, including supervision of farmer cooperatives in conjunction with Japan's Ministry of Agriculture, Forestry and Fishery and workers' cooperatives jointly with Japan's Ministry of Labor. Thus, the Financial Reconstruction Commission had more financial firms under control than the Finance Ministry used to have.
In addition, a Financial Reconstruction Commission (FRC) was established in Japan, that was made responsible for funding of financial institutions faced with financial difficulty, and developing mechanisms designed to solve problems facing institutions in bankruptcy. In 1998-2000, the Financial Reconstruction Commission was under the jurisdiction of FRC affiliated with the Prime Minister's Administration, however, the FRC merged with the FSA in 20011.
In 2000, control over the Financial System Planning Bureau was handed over from the Finance Ministry to the Financial Supervisory Agency which was renamed as the FSA.
The Financial Services Agency plays a pivotal role in maintaining financial stability of the nation and anti-crisis management, protecting consumers and establishing fair and transparent financial markets. When the FSA was vested with the planning function, it became a more modest regulator than its predecessor was. The FSA started initiating less shutdowns of financial institutions, because the Financial System Planning Bureau would have otherwise been proven inefficient.
The Financial Services Agency, headed by the Minister of State for Financial Services, is affiliated with Japan's Cabinet of Ministers Administration. The FSA comprises a Planning and Coordination Bureau, an Inspection Bureau and a Supervisory Bureau. The Planning and Coordination Bureau is headed by the Vice Commissioner for Policy Coordination, the Deputy Director-General and the Deputy Commissioner of the Planning and Coordination Bureau.
The FSA also comprises the SESC and the Certified Public Accountants and Auditing Oversight Board (CPAAOB). The SESC includes the chairperson and two commissars designated by the Prime Minister, and the CPAAOB is comprised of the chairperson and nine commissars designated by the Prime Minister2.
The FSA's annual budget is subject to approval by the Minister of State for Financial Services and the Finance Ministry as well as the Parliament, thus making the regulator politically dependent.
The FSA is responsible for monitoring of banks, insurance undertakings, securities firms and other financial institutions.
1 See Financial Services Agency. Pamphlet (March, 2017). P. 2. URL: http://www.fsa.go.jp/ en/about/pamphlet.pdf
2 See ibid. PP. 8, 13, 14.
The Planning and Coordination Bureau is responsible for coordinating activities undertaken by the FSA, developing a financial services policy and rules, consulting of Japan's government on laws and regulations governing financial services.
The Inspection Bureau is responsible for on-site inspections of financial institutions with a view to monitoring their compliance with the rules in place and assessing risk management.
The Supervisory Bureau is responsible for monitoring financial institutions in order to ensure security and sustainability. The Bureau includes branches of large banks, regional banks, insurance undertakings and securities firms.
The SESC is responsible primarily for capital markets integrity and investor protection. The SESC monitors securities market participants and investigates into alleged misconduct cases, such as insider trading. However, the SESC may not take direct enforcement actions and therefore should recommend the Minister of State for Financial Services and the FSA Commissar to take disciplinary actions or lodge a complaint to the prosecutor.
The Certified Public Accountants and Auditing Oversight Board (CPAAOB) operates independently from the FSA. The CPAAOB is responsible for auditing reports issued by the Institute of Certified Public Accountants (ICPA). It is also entitled to carry out on-site inspections at the ICPA and audit firms. Like the SESC, the CPAAOB may not take direct enforcement actions1.
Japan's principal entities of financial regulation are, besides the FSA, the Finance Ministry, the Bank of Japan and the Deposit Insurance Corporation of Japan (DICJ).
The Finance Ministry, after its financial services supervisory power was handed over to the FSA, is responsible for managing the central government's budget and maintaining a stable foreign exchange market. The Finance Ministry would contribute to financial stability in times of crisis.
The Bank of Japan is responsible for monetary policy and financial stability through financial system sustainability analysis and assessment; coordination of micro-prudential activities related to on-site inspections and external monitoring; administration of polices to maintain a stable financial system (including the lender of last resort); management and monitoring of payment and settlements systems.
The Deposit Insurance Corporation of Japan is a quasi-autonomous public organization that was established in 1971. The Corporation is responsible for deposit insurance payments if a bank goes bust. Its subsidiary, the Resolution and Collection Corporation, is responsible for asset management and disposal of assets purchased from bankrupt financial institutions.
In 2012, the IMF recommended Japan to establish a financial stability committee with the aim to coordinate its entities' efforts to weight and eliminate systemic risks2.
1 See Financial Services Agency. Pamphlet (March, 2017). 3, 6, 9-14. URL: http://www.fsa.go.jp/ en/about/pamphlet.pdf
2 See International Monetary Fund. Japan: Financial Sector Stability Assessment Update (August, 2012). IMF Country Report No. 12/210. P.19. URL: http://www.imf.org/external/pubs/ft/scr/2012/cr12210.pdf
In the end, the following conclusions can be reached. The FSA is by far not the first megaregulator in Japan's financial market. The Finance Ministry used to employ a unified regulation approach for more than 100 years until it was replaced by the megaregulatory approach.
The modern version of Japan's megaregulatory approach derives from separation rather than integration, as in most cases, of regulatory and supervisory power in financial markets.
The financial market regulation framework in Japan is not an ideal one. Many regulatory and supervisory functions are concentrated in a handful of regulatory authorities, which, given certain conditions, may result in concentration of power and excessive regulation, as evidenced by the Finance Ministry's past experience as financial market regulator.
In addition, the FSA in Japan is not a common practice in world's major economies involving an dependent financial markets regulator. Besides the fact that the FSA is affiliated with the Cabinet of Ministers Administration, it is funded from the central government's budget. The central government is normally a major debtor in the national financial market and has a conflict of interests with regulated firms - that's why the independent status of the financial regulator is so important1.
Overall, the FSA has demonstrated positive outputs. The establishment of the FSA has not contributed to a weaker regulatory competition due to a lack of big number of regulators prior to the establishment. The FSA, as a single regulator, is running a moderate enough policy and has a high level of competence to be able to analyze all aspects of financial conglomerate on a consolidated and functional basis.
6.2.5. Singapore: central bank is a megaregulator
Megaregulation is not the most wide-spread model of financial market regulation because it is believed to be not quite effective. The use of the central bank as a single regulator is not often found in countries with small financial markets, either. However, there is one exception, Singapore, the country with not only a large financial market, but the world's leading one whose central bank - the Monetary Authority of Singapore (MAS) - is the megaregulator of the financial market.
At present, Singapore is a leading financial center though as early as 1965 after its independence from Malaysia it was attributed to the Third World countries. Apart from its geographic situation, which permitted Singapore to fill a time span when other financial markets are closed within a day, the main and unique drivers behind Singapore's financial growth were the following: (1) the government's political will,
1 See Bando H. Single Regulator or Twin Peaks, The Different Regulatory Approach by UK, Switzerland and Japan (May 1, 2014). 150 Years Anniversary Yearbook, 2014. P. 82-83. URL: https://ssrn.com/abstract=2876022
(2) efficient utilization by the government of the industrial policy and
(3) uncompromised supremacy of the law1.
Established in 1971, the MAS is the central bank, regulator of the market behavior and prudential regulator. The MAS is an integrated supervising authority for the country's all financial institutions: banks, insurers, capital market intermediaries, financial advisors and the stock exchange. The MAS engages in training of small investors2.
The MAS carries out financial supervision by means of four groups3:
- the banking and insurance group dealing with system risks and capital requirements is made up of three banking departments, the insurance department and the department for prevention of money laundering;
- the capital market group which exercises control over the market behavior and investors4 includes three capital market intermediaries departments, the corporate finance and consumers department, the market policy and infrastructure department and the enforcement department;
- the policy, risk and surveillance group consists of the prudential policy department, the technological risks and payments department and the macroprudential supervision department;
- the data analytics group includes three departments.
Also, the MAS's lines of activities include the monetary policy and investments, international issues and corporate development; each line of activities is dealt with by individual groups consisting of several departments.
The Singaporean approach to the financial market regulation is quite the opposite to the policy of noninterference by the state. In Singapore, the state retains a tight control over domestic finances and does its utmost to attract foreign companies to the country (quick issuing of licenses and working visas, granting of tax privileges and other).
When necessary, Singapore's financial regulator can be flexible. To develop its own asset management business, Singapore attracted assets from Hong Kong, having taken advantage of the transfer of the latter to China in 1997. To retain those assets, Singapore approved trust accounts which were of no interest to the residents of Singapore because of the local system of tax privileges.
1 See: Wang J.Y. The Rise of Singapore As International Financial Centre: Political Will, Industrial Policy, and Rule of Law (Feb 18, 2016). in Jiaxiang Hu, Matthias Vanhullebusch & Andrew Harding (eds.), Finance, Rule of Law and Development in Asia: Perspectives from Singapore, Hong Kong and Mainland China (leiden/Boston: Brill Academic Publishers, 2016). P 3-6. URL: https://ssrn. com/abstract=2970363
2 See: Schmulow A.D. Approaches to Financial System Regulation: An International Comparative Survey (January 27, 2015). CIFR Paper No. 53/2015. pp. 12, 13. URL: https://ssrn.com/ abstract=2556545
3 See: MAS. Organisation Structure (September 29, 2017). URL: http://www.mas.gov.sg/About-MAS/Overview/Organisation-Chart.aspx
4 See: Tjio H. Challenges to Singapore from the Global Financial Crisis: Actual and Suggested Legal and Regulatory Responses // Singapore Journal of Legal Studies. July 2013. p. 171.
Another example of flexibility is a gradual reduction by the government of the extent of protection of local companies in the 1990s within the frameworks of preparation to the upcoming globalization. Despite a strong discontent of local banks, the MAS initiated a five-year program to liberalize commercial banking in Singapore by permitting qualified foreign banks to open more branches and automated teller machines (ATMs). More licenses to carry out limited banking operations were issued. Also, the authorities lifted limits on foreign ownership in local banks1.
It is generally believed that the state interference does not promote competitiveness on the financial market, but as seen from Singapore's experience the state can play an important instrumental role in development of the financial market. Though Singapore has already become an international financial center, the government keeps rendering support. For example, in 2015 the MAS declared the establishment of the Financial Centre Advisory Panel (FCAP) made up of 26 leaders in banking, insurance and asset management. The FCAP discussed the strategy of further development of Singapore's financial center, including attraction of a large number of institutional investors to the capital market, promotion of innovations in the insurance industry, smoother capital growth of start-ups and global companies, development of e-commerce in foreign currencies, upgrading of liquidity on the Asian bond market and other2.
Singapore is famous for supremacy of the law and its strong commitment to formal procedures and requirements. As regards regulation of the financial and other markets, the government of Singapore has established a solid and comprehensive regulatory system under the auspices of the MAS and the Ministry of Finance; the system is characterized by a number of laws, including the Law on Banking, the Law on Companies, the Law on Financial Companies, the Law on Insurance, the Law on Securities and Futures Trading, the Law on Lending for Land Development Purposes and other. The MAS maintains a strict system of prudential regulation and surveillance which is sometimes regarded as overregulated, but it succeeded in safeguarding Singapore from financial crises. It is noteworthy that the MAS's check-ups and criticism play an important role. Noncompliance with the rules may result in huge penalties and even an imprisonment3.
Singapore has gone beyond the limits of the compliance and dominating risk management systems developed for minimizing risks to institutions. Instead, Singapore put the goal of "market integrity" on the same level with the risk management objective, that is, protection of the public interest. Companies are evaluated by their proven capacity to protect the public interest. In regulation procedures, such a decision coupled
1 See: Wang J.Y. Op. cit. pp. 10, 12-14, 16.
2 See: MAS. Capital Markets (26.11.2016). URL: http://www.mas.gov.sg/Singapore-Financial-Centre/Overview/Capital-Markets.aspx
3 In 2011, the Bank for Development of Singapore experienced a problem with operation of its ATMs for seven hours, of which only 1.5 hours were actually normal business hours. However, the MAS punished the bank by requesting it to allocate SGD 230 million worth of an additional capital buffer against the operational risk. The bank was required to maintain additional capital (which did not earn the bank any income) until next October. See: Schmulow A.D. Op. cit. pp. 13, 14.
with the requirement to report any suspicions (not the concrete evidence of unlawful activities) and enforcement tools in place create the effect of permanent surveillance over all the aspects of the financial market1.
So, the establishment of a certain pattern of regulation of the financial market does not necessarily guarantee the effectiveness of regulation. As seen from the experience of Singapore, if handled proficiently, even not quite a popular model of regulation may produce good results.
The success of the MAS - Singapore's single financial market regulator - can be primarily explained by the political will and uncompromised supremacy of the law. Despite tight control and the MAS's active interference, which practices are often regarded as hazardous to the financial market, flexibility and far-sightedness of this mega regulator are praised highly and make it effective.
6.2.6. Bank of Russia as megaregulator
The Russian Financial Market: Main Stages of Regulation
Established in the early 1990s, the present-day Russian financial market is almost 30 years old. In the history of its development, it is possible to single out several stages2. Stage I: 1990-1998
The 1990s were the period of the radical transformation of the economy as a whole, denationalization and switchover to the market economy. After the period of complete nonexistence of the financial sector in market terms, the foreign exchange market, the stock market and the capital market were established with an initial regulatory base formed. However, inadequate starting conditions for such large-scale reforms and the economic crisis of 1998 hindered development of the financial market and affected the quality of its further formation3. Stage II: 1999-2008
In 1999-2002, the economy gradually recovered and a drop in output volumes gave way to growth on the back of appreciation of prices of primary products. The latter factor, along with a number of institutional factors, contributed to the establishment of a market model4 with a broad expansion of the state as the owner and slowdown of the
1 See: O'Brien J. Singapore Sling: How Coercion May Cure the Hangover in Financial Benchmark Governance (November 5, 2013). Edmond J. Safra Working Papers, No. 29. P. 23. URL: https://ssrn.com/abstract=2350445.
2 See hereinafter: N. Polezhayeva. Financial Market Regulation in 2013-2016: New Entities and Requirements / N. Polezhayeva // The Russian Economy in 2016. Trends and Prospects. (Issue 38) / [V. Mau and others.; edited by S.G. Sinelnikov-Murylev (Chief Editor), A.D. Radygina]; Yegor Gaidar Institute for Economic Policy - Moscow: Gaidar Institute's Publishing House, 2017. pp. 416-418.
3 See: K.V. Krinichansky. The State of Things and Issues of Development of the Financial Market in Russia // The Economic Theory Journal. 2013. No. 3. pp. 68-81.
4 For more details, see: A. Abramov, A. Radygin. Russia's Financial Market Amid State Capitalism // Voprosy Ekonomiki. 2007. No. 6. pp. 28-44.
rates of implementation of market and institutional reforms in the country. Due to the visible nationalization of the economy, the financial market did not develop fast enough. The comparison of the parameters of the Russian financial market with those of leading countries' shows clearly that the Russian financial market is currently rather small.
A lack of proper attention to the need of development of market institutions resulted in emergence of multiple negative consequences, including the legal vacuum, a delay in introduction by stock markets of the best trading technologies and centralized clearing, lack of the central securities depositary, serious limitations on growth of the institute of pooled investments and other. As a result, the Russian financial market happened to be sensitive to external factors which situation was explicitly evident during the global financial crisis of 20081. Stage III: 2009-2012
In the period under review, there was no qualitative upgrading of the competitive edge of the Russian financial market. Growth-related problems were partially caused by global phenomena, such as the reorientation after 2008 of foreign investment flows from emerging markets to developed countries, slowdown of economic growth rates in developing countries, high volatility and reduction of financial market liquidity. However, the Russian financial market's problems are largely related to domestic factors, such as geopolitical risks, structural economic imbalances, unfavorable investment climate, the state's growing influence in the economy, the low level of the competition on the domestic market, recurrent modification of rules of pension assets formation, lack of a concrete strategy of the financial market development, paternalism and the low level of households' financial literacy2.
However, after the financial crisis made the issues of system risks and inadequacy of the system of regulation and supervision of financial markets more acute the reforms focused on the regulation of this sector. A plan of actions was developed to establish an international financial center in Russia. A priority line of this plan was to toughen control over system risks on financial markets through establishment of the megaregulator.
Establishment of the single regulator was justified by weak competitiveness of the Russian financial market whose development was adversely affected by insufficient networking between the regulatory authorities (Federal Financial Markets Service (FFMS), the Ministry of Finance, the Rosfinmonitoring and others), which controlled individual, often overlapping, market segments and could not receive in a timely fashion the complete and reliable information, nor assess properly the situation on the market.
1 See: The Financial Crisis in Russia and the World / Edited by Yegor Gaidar. Moscow: Prospekt, 2009; L.L. Igonina. The Global Financial Crisis and its Effect on the Russian Financial Market // The Economic Bulletin of the Rostov State University. 2008. Vol. 6. No 4. pp. 62-69.
2 See: A.E. Abramov. The Russian Financial Market: Factors of Development and Growth Barriers / A. Abramov. Science Editor Professor A.D. Radygin, D.Sc. Economics. Moscow: The Gaidar Institute Publishers, 2017. p. 7.
It is to be noted that some market segments, for example, the foreign exchange market remained beyond regulation for a long time.
The development of the financial market which was proceeding at an advanced rate compared to the legal and regulatory environment required harmonization of the financial legislation and elimination of discrepancies and gaps.
The advantages of the new system of regulation and supervision on financial markets should be the following: establishment of the single legal system, quality monitoring of financial markets, real-time identification of possible system risks and handling of a large range of issues, networking in implementation of the financial policy for development and facilitation of expansion of financial services and upgrading thereof.
Despite the advantages, megaregulation involves some risks: a small number of the results of the reform because of its large scale; escalation of the conflict of interests and consolidation of functions within the regulator which role is mainly claimed by the Central Bank of the Russian Federation; the risk of the regulator becoming an excessively authoritarian authority (including the loss of independence by self-regulating entities) and unification of regulation of different types of financial institutions based on approaches formed in respect of banks; infringement of interests of non-banking financial institutions1. The abovementioned factors were behind the emergence of numerous opponents of the reform in the expert and professional communities.
However, the existence of risks does not mean that they will definitely materialize. As seen from the foreign experience, there are examples both of successful megaregulators (Germany, Japan and Singapore) and inefficient ones (the UK). But it was infeasible to assess unambiguously the viability of such system of regulation on the Russian financial market before it started functioning. Stage IV: 2013 - present day
From September 1, 2013 the Central Bank of the Russian Federation is entrusted with regulatory and supervising functions over the activities of the entire range of non-credit financial institutions from brokers-dealers to pawnbrokers2. The Central Bank of the
1 See: T.E. Rozhdestvenskaya. Establishment of the Megaregulator in Russia: Purposes, Objectives, Issues and Prospects of Development // The Bankovskoe Pravo. 2013. No.5. pp. 10-17; Yu.N. Snezhko. The Formation of the Megaregulator and the Consequences for the Establishment of the International Financial Center in Russia // The Statistika i Ekonomika. 2014. No.5. pp. 90-94; A.S. Veselova, S.N. Volodin. The Central Bank of the Russian Federation as an Integrated Financial Regulator // The Stock Market: The Modern Condition, Instruments and Trends of Development. The 12th XII Interacademic Symposium. Moscow, April 14, 2015. The National Research University the Higher School of Economics, the Moscow State Institute for International Relations (University), the Plekhanov Russian University of Economics, the Financial University under the Government of the Russian Federation / Science editors N.I. Berzon and S.N. Volodin. Moscow: KURS, 2015. pp. 191-201.
2 See: Federal Law No.251-FZ of July 23, 2013 "On Amendment of Individual Statutory Acts of the Russian Federation Subsequent to the Transfer to the Central Bank of the Russian Federation of Regulatory and Supervision Authorities over Financial Markets" // The Rossiiskaya Gazeta. July 31, 2013. No. 166; Article 76.1 of Federal Law No.86-FZ of July 10, 2002 "On the Central Bank of the Russian Federation (Bank of Russia)" // The Rossiiskaya Gazeta. July 13, 2002. No.127.
Russian Federation has become the megaregulator of financial markets, which signifies the start of the large-scale institutional reform of the country's financial sector.
According to the Constitution of the Russian Federation, the Central Bank of the Russian Federation is an independent sole regulator because it carries out its functions and duties independently from other state authorities1. However, some researchers believe that with the FFMS's authorities transferred to the Central Bank of the Russian Federation, the latter comes under the influence of the executive authorities because it has to get approval of its position from the Government of the Russian Federation2.
Other experts believe that "it is impossible to combine conflicting functions and set quite the opposite objectives to one and the same body with a single management. The Central Bank of the Russian Federation should see to it that banks do not go bankrupt and risks are monitored"3, on one side, and stimulate the economy via issue mechanisms, on the other side. The case for it is the fact that only countries with too small markets (Singapore is an exception) and domination of foreign investments select the central bank as a sole regulator.
The issue of the status of the Central Bank is debatable; the law does not include any norms that the Central Bank of the Russian Federation is a state authority. However, according to Article 7 of the Law "On the Central Bank of the Russian Federation" as regards the issues attributed to the competence of the Central Bank of the Russian Federation, the latter issues statutory acts in form of orders, resolutions and instructions which are binding upon federal authorities, authorities of the subjects of the Russian Federation, local governments, legal entities and individuals. Actually, the Central Bank of the Russian Federation is entrusted with state powers. In addition, as per the Constitutional Court's findings outlined in the Definition of December 14, 2000 the Central Bank of the Russian Federation4 as a state body has powers of a judicial nature because implementation thereof is closely related with application of state enforcement measures5.
1 See Article 75 of the Constitution of the Russian Federation; Article 1 of Federal Law No. 86-FZ of July 10, 2002 "On the Central Bank of the Russian Federation (Bank of Russia)" // The Rossiiskaya Gazeta, No.127, July 13, 2002.
2See: E.M. Aminiova. The Modern Trends in Regulation and Supervision of Financial Markets // The Bankovskoe Pravo. 2015. No.4. pp. 26-34; P.D. Barenboim, D.V. Kravchenko. Establishment of the Megaregulator on the basis of the Bank of Russia in Terms of its Independent Constitutional Status // The Zakonodatelstvo i Ekonomika (Legislation and Economy). 2013. No. 6. pp. 5-8.
3 O.E. Medvedeva, T.V. Makshanova. The Advantages and Disadvantages of Establishment of the Megaregulator on the Russian Financial Market // The Vektor Nauki TGU. 2013. No.3(25). p. 354.
4 Definition No.268-O of December 14, 2000 of the Constitution Court of the Russian Federation "At the Request of the Supreme Court of the Russian Federation on Examination of the Validity of Part Three of Article 75 of the Federal Law "On the Central Bank of the Russian Federation (Bank of Russia)". URL: www.ksrf.ru
5 See: N.A. Taraban. The Central Bank of the Russian Federation (Bank of Russia) in the System of State Authorities: The Constitutional and Legal Grounds of Organization and Operation // The Finansovoe Pravo. 2017. No 6. pp. 44-47.
Those who hold different views believe that the Central Bank of the Russian Federation is not an independent state authority. For example, V.Yu. Patenkova provides her reasons to this effect1. The findings on the Central Bank's political independence based on the analysis of the procedure for appointment of the Chairman of the Central Bank, his/her deputies, members of the Board of Directors, as well as members of the National Banking Council are unconvincing. With the presidential majority in the State Duma, any candidate proposed by the President of the Russian Federation will be elected the Chairman of the Central Bank of the Russian Federation.
The Central Bank's senior management believes that the Central Bank is a special public institute which is not a state body, but entrusted with powers of state authority2.
At the present stage, the specifics of the Russian financial system can be explained by the following3:
a) globalization, growing internalization of securities markets, higher volumes of cross-border investment deals and tougher competition between global financial centers;
b) prevalence of credit institutions;
c) low activity of households on the financial market;
d) households' preference of credit institutions;
e) low level of confidence in non-credit financial institutions because of the violations they commit amid insufficient supervision;
f) households' high demand in bank deposits;
g) weak corporate governance in joint-stock companies due to which the Russian equity market has failed to become the source of a large-scale attraction of capital.
As a result, the Russian financial market which used to develop dynamically in 20122015 is still short of high positions in the context of global competition.
The World Economic Forum prepares on the annual basis the indices of countries' global competitiveness. In 2017-2018, Russia is rated the 38th out of 137 places, that is, 26 positions upwards as compared to the 2012-2013 period which preceded the establishment of the Central Bank of the Russian Federation as the megaregulator of financial markets. However, as regards one of the rating's components - the development of the financial market - Russia occupies the 107th place out of 137 places. At the same time, as compared to the results achieved in the 2012-2015 period the indicators of the "development of the financial market" component improved (see Fig. 1 и 2)4.
1 V.Yu. Patenkova. The Legal Status of the Bank of Russia // The Yurist. 2017. No. 9. pp. 38-41.
2 See: The Legal Status and Functions of the Bank of Russia (July 08.07.2014). URL: http://www.cbr.ru/today/?PrtId=bankstatus
3 See hereinafter: The Bank of Russia. The Main Lines of Development of the Financial Market of the Russian Federation in 2016-2018 (May 26, 2016) // URL: http://www.cbr.ru/finmarkets/files/ development/onrfr_2016-18.pdf
4 See: World economic forum. The global competitiveness report 2017-2018 // URL: http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport 2017%E2%80%932018.pdf
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018
Fig. 1. Dynamics of "Development of Financial Market" component of Russia's rating of global competitiveness
Source: The World Economic Forum. The global competitiveness report 2017-2018; The Central Bank of the Russian Federation. The Main Guidelines for Development of the Financial Market of the Russian Federation in 2016-2018 (May 26, 2016).
In the international rating of favorable business conditions as regards financial markets - the rating is prepared on the annual basis by the World Bank - Russia is rated the 29th out of 190 places and the 51st as regards "the availability of loans" and "the protection of minority shareholders", respectively, as of June 20171.
According to the data of Z/Yen, a financial and consulting company, in September 2015 out of 84 global financial centers Moscow occupied the 78th place, while in March 2016, the 67th place out the total of 86 places. In 2014, the information agencies Dow Jones and Xinhua put Moscow on the 33rd place out of 45 international financial centers, that is, five positions downwards as compared to 2013. However, as regards "the financial market" factor, Moscow moved upwards from the 30th place to the 23rd place2.
According to the available estimates, the present-day Russian financial market is characterized by stagnation of the earning power of Russian companies' equities and favorable conditions for investment into government and corporate bonds3. As regards the former, the stagnation is a result of freezing of domestic pension assets and the outflow of capital of foreign portfolio investors as their interest in financial instruments of Russian entities is limited by a lack of substantial changes in the investment climate. In its turn, the bond market growth was facilitated by the low rate of inflation and interest rates on bank deposits coupled with a considerable "money overhang" in the economy and emerging interest in government and corporate bonds, whose yield stabilization was
1 See: The World Bank. Assessment of Business Regulation (Doing business): The rating of countries // URL: http://russian.doingbusiness.org/rankings
2 See: The Bank of Russia. The Main Guidelines for Development of the Financial Market of the Russian Federation in 2016-2018 (May 26, 2016).
3 See: A. Abramov. The Risks of the Russian Financial Market // The Russian Economy in 2017. Trends and Prospects / [V. Mau and others; edited by S.G. Sinelnikov-Murylev, Doctor of Economics (Chief Editor), A.D. Radygin, Doctor of Economics]; The Gaidar Institute for Economic Policy - Moscow: The Publishers of the Gaidar Institute, 2018. - pp. 145, 146.
a driver of sped-up growth in new bond issues. In the domestic market regulation, the priority lines may become the development of domestic institutional investors, formation of consistent rules as regards pension assets, upgrading of the investment climate and promotion of the competitive environment on the domestic stock market.
■ 2012-2013
□ 2013-2014 B2014-2015 П2015-2016
□ 2016-2017 ',2017-2018
Fig. 2. Indicators of "Development of Financial Market" component of Russia's rating of global competitiveness
Source: The World Economic Forum. The global competitiveness report 2017-2018; The Central Bank of the Russian Federation. The Main Guidelines for Development of the Financial Market of the Russian Federation in 2016-2018 (May 26, 2016).
Megaregulation: practice of2013-2018
The megaregulator started its activities amid unfavorable external conditions: financial sanctions, structural constraints of the Russian economy and negative growth rates. However, the megaregulator demonstrated a high level of activity in various lines. In particular, in 2013-2018 the Central Bank of the Russian Federation as the megaregulator achieved substantial results in the following: 1. Approval and introduction of the Corporate Governance Code1.
The Russian Corporate Governance Code (CGC) was approved in 2014. It is a high quality document with a good pattern and content which comply with the relevant international standards of corporate governance, including the OECD Corporate Governance Guidelines and it is in no way inferior to corporate governance codes of other countries, but, on the contrary, in some cases it is even much better (Part Two of the CGC is of an advisory, rather than annotative nature; it includes a definition of the
1 See: hereinafter: Resolution No.44-SF of March 01, 2017 of the Council of Federation of the Federal Assembly of the Russian Federation "On the Activities of the Central Bank of the Russian Federation (Bank of Russia) as Regards Regulation, Control and Supervision over Financial Markets in 2013 -2016" //The Official Gazette of the RF, March 06, 2017, No. 10, p. 1438.
independent director and individual chapters on the scheme of remuneration and other). The CGC is aimed at promoting efficiency of management of Russian companies and ensuring their long-term and sustainable development.
As regards compliance with the CGC, the Central Bank of the Russian Federation positively estimated the average level of compliance by Russian listed companies with the CGC's principles and guidelines; in 2016 it was equal to 69 percent of all the principles, that is, 11 percent more as compared to 2015. In future, the Central Bank of the Russian Federation expects growth in compliance, though a moderate one.
Despite some discrepancies in their results, a number of other entities (the Rosimuschestvo, the Otkrytoe Pravo, Expert Council under the Government of the Russian Federation and the Working Group on Establishment of Multifunctional Centers for Provision of State and Municipal Services (MCPSMS) dealing with issues of introduction of the principles of the CGC into some Russian companies rated highly the level of compliance with the CGC's principles. In 12 joint-stock companies which are subordinate to the state, the level of compliance is equal on average to 90 percent. It is to be noted that in lots of developing and developed countries, there is an explicit problem of the corporate governance code being applied in practice1. In Russia, such a conflict between the regulatory requirements and the actual practice of application of the Code's norms is more acute, so one should not overestimate the effect of nonbinding norms.
2. Reformatting of individual types of financial activities, such as the operations of insurance companies, nongovernment pension funds, microfinance entities, actuaries and credit rating agencies.
As regards the insurance industry, a decision was taken on the establishment of a reinsurance company and a switchover to a new sectorial standard and chart of accounts for insurance companies. As regards nongovernment pension funds, a mechanism of state regulation thereof was developed, state insurance of pension assets was introduced and a self-regulating entity of nongovernment pension funds was established.
As regards microfinance operations, self-regulation was introduced and the regulator's authorities were expanded. In March 2016, microfinance entities (MFE) were legislatively divided into two types: microfinance companies (MFC) and microcredit companies (MCC)2.
From January 1, 2015, Federal Law No. 293-FZ of November 2, 2013 "On Actuarial Activities in the Russian Federation" came into effect. The law was developed to
1 See for more details: N.A. Polezhayeva. Compliance with the Corporate Governance Code in Russia: Any Improvements? // The Russian Economy in 2017. Trends and Prospects. Yegor Gaidar Institute for Economic Policy. Moscow: The Gaidar Institute's Publishers, 2018. - pp. 452-478.
2 See: The Central Bank of the Russian Federation Told About Changes in the Activities of Microfinance Entities (March 30, 2016). URL: http://rapsinews.ru/incident_news/20160330/275725588. html#ixzz5BUwdNurp
introduce effective statutory regulation and the institute of self-regulation of actuaries as a condition for professional qualification and compliance of the legislation of the Russian Federation on actuarial activities with the international legislation.
The law defines the "actuary" as an individual who carries out in accordance with the labor contract or civil law contract actuarial activities and is a member of a self-regulating organization of actuaries. To join this organization, an individual has to pass the qualification exam which procedure is set by the Central Bank of the Russian Federation.
The Central Bank of the Russian Federation has approved the entire range of statutory instruments and standards to regulate actuaries' activities1.
In June 2015, Law No.222-FZ of July 13, 2015 "On the Activities of Credit Rating Agencies of the Russian Federation, On Amendment of Article 76 of Federal Law "On the Central Bank of the Russian Federation (Bank of Russia) and Recognition as Null and Void of Individual Provisions of Statutory Acts of the Russian Federation" was approved.
In the Russian Federation, rating activities can be carried out by legal entities in the form of incorporation after the information on such legal entities has been entered by the Central Bank of the Russian Federation into the register of credit rating agencies. Other legal entities are not entitled to carry out such activities.
The minimum size of the own funds (capital) for the credit rating agency is set in the amount of RUB 50 million.
Credit rating agencies have to ensure:
1) independence of rating activities, including from any political and (or) economic influence;
2) prevention and identification of conflicts of interest, handling thereof and disclosure of the information on such conflicts;
3) compliance with the requirements of the effective Federal Law.
The Central Bank of the Russian Federation keeps the register of credit rating agencies, establishes the methods of determining the size of the own capital, examines the agencies' activities, sends to the agencies mandatory orders and handles claims and applications as regards activities of credit rating agencies. Also, it sets the format of reporting for such agencies and other2.
It is to be noted that utilization of formal approaches in carrying out supervision over credit and non-credit financial institutions is still a serious disadvantage, which is
1 See: Documents regulating actuarial activities. URL: http://www.cbr.ru/finmarket/common_ inf/legals_actuarial/
2 Federal Law No.222-FZ of July 13, 2015 "On the Activities of Credit Rating Agencies of the Russian Federation, On Amendment of Article 76 of the Federal Law on the Central Bank of the Russian Federation (Bank of Russia) and Recognition as Null and Void of Individual Provisions of Statutory Acts of the Russian Federation" // RG, No. 156, July 17, 2015.
caused, among other things, by limitation of the legal capacity of the Central Bank of the Russian Federation as regards implementation of comprehensive approaches to evaluation of risks of credit and non-credit financial institutions and their overall activities. In this context, the Central Bank of the Russian Federation plans to introduce consistently the mechanism of expert judgment on individual issues related to financial institutions' activities with control over the decision-making procedure of the Central Bank of the Russian Federation stepped up simultaneously.
Also, the Central Bank of the Russian Federation intends to develop approaches to provision of services to small supervised financial institutions which may maintain accounting of their business activities without an obligation to submit reporting provided that the Central Bank of the Russian Federation is granted the right to use directly the accounting data, including by means of cloud technologies. Also, the specified institutions will be able to use a simplified format for submitting annual reporting. Implementation of the data-centricity approach to networking between the regulator and supervised institutions as regards the receipt of the reporting data will create the basis for the regulator's future access to financial market participants' databases with the initial data required for supervisory functions to be carried out1. 3. Establishment of the system ofprudential supervision over the activities of nongovernment pension funds and work on development of the system ofprotection of pension assets.
Priorities in supervision over the activities of nongovernment pension funds changed from quality performance indicators to the risk-oriented oversight. The main goal of such supervision is to ensure financial stability of funds and protect interests of participants and insured persons.
A switchover to the prudential supervision system was carried out in three stages. At the first stage (2013 - April 2014), comprehensive evaluation of nongovernment pension funds' activities in mandatory pension insurance and nongovernment pension insurance was carried out. At the second stage (2014 - December 2016), measures on establishment of the prudential risk-oriented supervision on the market of mandatory pension insurance and nongovernment pension insurance were developed. At the third stage (from 2017), prudential risk-oriented supervision was introduced on a mandatory basis.
Introduction of the mandatory risk-oriented supervision involves a switchover of nongovernment pension funds, asset management companies and specialized depositaries to corporate governance standards based on risk evaluation, as well as a switchover of the Central Bank of the Russian Federation to risk-oriented supervision2.
1 The Main Guidelines for Development of the Financial Market of the Russian Federation in 20162018. URL: http://www.consultant.ru/document/cons_doc_LAW_256439
2 See for more details: The Plan of Measures on Introduction of Prudential Supervision in the System of Mandatory Pension Insurance in the Nongovernment Pension Insurance Scheme (June 02, 2014). URL: http://pensionreform.ru/73599
Establishment of the system of protection of pension assets includes the following:
• selection by the Central Bank of the Russian Federation and entry into the register of nongovernment pension funds on the basis of sufficiency of investment funds, organization of investment activities, risk management, in-house control and business reputation. At present, the system of protection of pension assets includes 41 nongovernment pension funds;
• approval of Law No.422-FZ of December 28, 2013 "On Protection of Pension Entitlements of Insured Persons in the Mandatory Pension Insurance System of the Russian Federation";
• establishment of the Fund for Protection of Pension Assets managed by the Deposit Insurance Agency (DIA) to ensure minimum the return of pension assets and maximum appreciation of the value thereof. The system of protection of pension assets is made up of two tiers and includes the following:
- funds which form the mandatory pension insurance reserve of each nongovernment pension fund;
- the fund for protection of individuals' allocations managed by Deposit Insurance Agency (DIA).
The DIA carries out record keeping of all the nongovernment pension funds included in the register of participants which form this fund. The terms for a nongovernment pension fund to become a member of the system in question are as follows:
- availability of the license;
- transformation into a joint-stock company;
- approval by the Central Bank of the Russian Federation upon completion of a relevant examination of the fund's activities;
- payment of mandatory contributions.
Those nongovernment funds which failed to be entered in the register are obligated to stop making contracts on mandatory pension insurance and transfer pension assets at their disposal to the Pension Fund1.
At present, there is an entire range of issues related to further regulation of the sector, including facilitation of a decent level of individuals' pension provision, a retirement-age increase, solution of the issue of nonpayment by the shadow sector of the economy of pension contributions and expediency of maintaining the practice of early pensions2.
1 See: The System of Protection of Pension Assets. URL: http://pensiology.ru/ops/budushhim-pensioneram/formirovanie-nakopitelnoj-pensii/garantirovanie-nakoplenij/
2 See for more details: A.V. Tsyplakov. The Pension System in 2016-2025: The Prospects of Reforming and Evaluation of Consequences (July 11, 2016). URL: http://izron.ru/articles/tendentsii-razvitiya-ekonomiki-i-menedzhmenta-sbornik-nauchnykh-trudov-po-itogam-mezhdunarodnoy-nauch/sektsiya-1-ekonomicheskaya-teoriya-spetsialnost-08-00-01/pensionnaya-sistema-v-2016-2025-gg-perspektivy-reformirovaniya-i-otsenka-posledstviy/
4. Progress in investigation of cases of manipulation practices and insider trading. As a result, within three years the number of such practices diminished1.
According to the open access data of the Central Bank of the Russian Federation, in 2015-2017 the regulator stepped up its activities in this field. The illegal utilization of the insider information and/or risk manipulation were found in operations with securities of the PAO (Public Joint-Stock Company) Nizhmekamskneftekhim, the PAO AFK Sistema, the PAO Novorossiisky Torgovy Port, the PAO Saratovsky Neftepererabatyvauschi Zavod (Saratov Oil Refinery), the ОАО Lenenergo, the ОАО Mechel, the ОАО NK Rosneft, ОАО Rusgidro, the ОАО Sberbank of Russia and other2.
5. Promotion of Availability of Financial Products and Services.
The specifics of the Russian financial market consist in the fact that households widely use banking credit instruments and distrust non-banking segments.
In January 2015, a new financial instrument - individual investment accounts - was introduced for individuals to increase the extent of their involvement in the financial market. This instrument is meant to reduce a tax burden on individuals' operations on the financial market. As of the end of 2015, 89,600 such accounts were opened and the volume of trading with those accounts involved amounted to RUB 43.1 billion3.
According to the data of the Moscow Stock Exchange and the NAUFOR (the National Association of Stock Market Participants), in 2018 the total amount of the attracted funds from individuals via individual investment accounts amounted to RUB 28 billion and about 700,000 new investors came to the market, that is, a threefold increase as compared to 2016. As of February 2019, the total sum kept on individual investment accounts exceeds RUB 48 billion. In 2018, individuals bought twice as many Russian government bonds as a year before. Also, investments in companies' equities increased, but not so spectacularly as in the state debt. Over 600,000 broker's accounts were opened akin to individual investment accounts4.
The interest in such investments can be primarily explained by a low banking interest rate on deposits and numerous cases of bank license withdrawals. Individuals have started to look for instruments which may yield a higher income.
Apart from comprehensive schemes, customized approaches to attraction of customers were developed. For example, a plan of measures (a road map) to promote accessibility of services of financial institutions to disabled persons, people with limited
1 See: hereinafter: The interview of E.A. Shvetsov to the Rating Information Agency (September 9, 2016). URL: http://www.cbr.ru/press/int/press_centre/Shvetsov_Reuters_09092016/
2 Identified cases of illegal utilization of the insider information and market manipulations. URL: http://www.cbr.ru/finmarket/inside/inside_detect/
3 See: The Main Guidelines for Development of the Financial Market of the Russian Federation in 20162018. p. 20.
4 Investment Account (IIA) in 2019: The Review of Advantages and Disadvantages. -http://dataworld.info/iis-individualnyj-investicionnyj-schet-vychet-nalog.php, February 06, 2019.
mobility and elderly people in 2017-2019 (approved by Resolution No. PM-01-59/31 of July 5, 2017 of the Central Bank of the Russian Federation) was worked out. The plan is aimed at eliminating physical accessibility problems and problems related to interfaces and digital information access, attitude of the personnel of financial institutions and comprehension of the nature of financial services and possible risks they may involve.
6. Protection of the rights of customers and investors in relations with financial market participants.
To ensure reliable protection of the rights of consumers of financial services, the Central Bank of the Russian Federation expects to establish and put into operation more effective schemes of handling the complaints of financial service consumers.
The Central Bank of the Russian Federation plans to develop and prepare on the annual basis the composite financial literacy index which includes the following:
a) research into the extent of public awareness of financial instruments, services and legitimate methods of protection of financial service consumers' rights;
b) research into households' competence (that is, practical application by households of their knowledge of financial instruments and services);
c) research into the extent of diversification of financial instruments and services used by households.
It is necessary to promote the role of the Call Center and Public Counseling Office established by the Central Bank of the Russian Federation to facilitate networking with consumers of financial services.
7. Establishment of the modern infrastructure of the financial market which meets international standards and putting into operation of the Mir national payment system and the system of transfer offinancial messages of the Central Bank of the Russian Federation.
The plan of measures (a road map) prepared for development of the electronic networking of the financial market is a comprehensive set of instruments aimed at upgrading the mechanisms of electronic networking on the financial market and switching over all the market participants, their customers, federal executive authorities and the Central Bank of the Russian Federation to the e-document flow. On May 18, 2015, the Road Map was approved by A.V. Dvorkovich, Deputy Chairman of the Government of the Russian Federation. Specifically, it is planned to establish end-to-end permanent links of electronic networking with all the entities of the financial market. Such links will be built with a gradual reduction of the share of the paper document flow on the financial market and elimination and prevention of gaps in the links, as well as proper information security of financial market participants ensured.
Also, it is planned to switch over a portion of services of the Central Bank of the Russian Federation into an electronic format with the e-government infrastructure utilized (including the single web site of state and municipal services).
It is to be noted that the Central Bank of the Russian Federation is considering the issue of a gradual modification of automated processes of collection and analysis of all the types of reporting of regulated entities on the basis of the new format which permits to eliminate the excessiveness and duplication of the reporting data, upgrade authenticity and quality of the incoming information and unify the format of interdepartmental electronic data exchange. In future, the unified format may facilitate reduction of the burden on regulated entities in preparation of reporting documents for different purposes and to various agencies.
8. Work on the "deal with the regulator " instrument.
In the next three years, the Central Bank of the Russian Federation expects to establish legislatively the right of insiders and market manipulators to make a deal with the regulator. The idea is mentioned in the draft of the Main Guidelines for Development of the Financial Market in 2019-2021.
At present, the Central Bank of the Russian Federation cannot reduce or abolish in return for cooperation the penalty on market participants who are suspected of manipulating or using the insider information, In the document of the Central Bank of the Russian Federation, it is specified that a deal with the regulator can speed up "the investigation of law infringements and make it possible to bring to responsibility a larger number of persons involved". The regulator intends to expand the scope of application of expert judgments in qualifying activities on the financial market.
Investigation of each case takes up to two years because in market manipulation and insider trading foreign entities are involved, too. It often happens that the institution is not aware of the fact that its employees may engage in insider trading. The share of this business in the overall volume of the institution's business can be rather small, but the reputational damage is very high. Reduction of the reputational damage can be the case for making a deal with the regulator1.
9. The new system of regulation of the activities of self-regulating entities on the financial market with active participation of the Central bank of the Russian Federation.
On July 13, 2015, the Federal Law on Self-Regulating Entities in the Financial Market2 (hereinafter Federal Law on SRE in FM) was approved.
Apart from regulating the activities of 16 types of self-regulating entities ranging from brokers to agricultural consumer credit cooperatives, the Federal Law on SRE in FM includes the "framework" norms of self-regulation; the specifics of regulation of the relations which emerge with activities of the SRE are determined either by the entity's
1 A. Astapenko. The Central Bank will Strike a Deal with Manipulators. - https://www.vedomosti.ru/ finance/articles/2018/06/06/772028-tsb-manipulyatorami, 06.06.18.
2 Federal Law No.223-FZ of July 13, 2015 "On Self-Regulating Entities on the Financial Market and Amendment of Article 2 and Article 6 of Federal Law No.157 of July 20, 2015 "On Amendment of Individual Statutory Acts of the Russian Federation"' // The Rossiiskaya Gazetta, No.157, July 20, 2015.
in-house documents or statutory act of the Central Bank of the Russian Federation as the regulator of the financial market1.
The financial market regulator determines the extent of its own participation in the activities of self-regulating entities on the financial market. It is feasible to single out some main risks to independent self-regulating entities:
1) Expanded legislative regulation, development and introduction of standards for SRE and expansion of the authorities of the Central Bank of the Russian Federation in this field;
2) Limitation of SRE's some genuine functions (appointment of the chief executive manager of the SRE and receipt of reporting from members of the SRE);
3) Reduction of the number of SREs of the same type coupled with mandatory membership in the SRE for financial institutions established and licensing of their activities preserved.
In addition, the role of laws regulating the activities of individual types of self-regulating entities of financial institutions remains uncertain. Also, it concerns the Federal Law "On Self-Regulating Entities" of 20072, which is applicable to some types of SRE which are regulated by the Federal Law on SRE in FM (SRE of consumer credit cooperatives, microfinance institutions and other) because relevant amendments have not been introduced, yet3.
6.2.7. Conclusion
In the past 20 years, megaregulation has become a comprehensive instrument of regulation of the financial market. Out of 70 countries, which carried out the reforms in 1998-2009 27 countries (38.5 percent) consolidated financial regulation and supervision one way or another.
The research into megaregulation of the financial markets of the UK, Germany, Japan and Singapore permits to draw a conclusion that one and the same model of regulation applied to different regulatory cultures and philosophies yields different results.
The German megaregulation is largely formal. The switchover to it was justified not by the failures of the previous model with a few regulators in place and a loss of
1 Hereinafter: M.A. Polezhayeva. Self-Regulating Entities on the Financial Market / N.A. Polezhayeva // Russia's Economic Development. 2015. No.12. pp. 116-121.
2 Federal Law No.315-FZ of December 01, 2007 "On Self-Regulating Entities" // The Legislation Bulletin of the Russian Federation, December 03, 2007, No. 49, Article 6076.
3 For example, Article 48 (1) of Federal Law No.39-FZ of April 22, 1996 "On Securities Markets" (See: The Legislation Bulletin of the Russian Federation, No. 17, April 22, 1996, Article 1918); Article 36.26 (1) of Federal Law No. 75-FZ of May 07, 1998 "On Nongovernment Pension Funds" (See: The Legislation Bulletin of the Russian Federation, No.19, May 11, 1998, p. 2071); Article 56 (1) of Federal Law No.215-FZ of December 30, 2004 "On Housing Savings Cooperatives" (See: The Legislation Bulletin of the Russian Federation, January 03, 2005, No.1 (Part 1), p. 41) include direct references to the voluntary association in the SRE of business entities which they regulate.
confidence in it, but changes in the financial market and the criticism from the outside which factors affected foreign investors' interest. Due to a high level of independence of entities which are included in the system of the chief regulator BaFin and the existence of other smaller regulators, the German model of regulation of the financial market remains to be sectorial. The BaSin is regarded as a moderate regulator which can be explained mainly by a high level of the legal culture of the market participants.
Both the Japanese and German megaregulators are not central banks, but unlike the latter the Japanese FSA is not an independent entity; it is a part of the Administration of the Cabinet Council of Japan and financed out of the state budget. The Japanese megaregulator is prone to concentration of powers and political pressure. Despite a trend towards overregulation, the FSA is a highly competent authority which demonstrates a more restrained approach to financial market participants as compared to its predecessors and rarely closes down financial institutions.
Singapore's MAS is the only example of the central bank in the role of a megaregulator in a country with a large financial market. In Singapore, megaregulation is characterized by uncompromised supremacy of the law and comprehensive active interference by the state which carries out strict control over market participants. However, flexibility and far-sightedness of Singapore's leaders and the MAS, in particular, make this approach effective to promote the competitiveness of Singapore's financial market.
Despite the substantial differences, the German, Japanese and Singaporean regulators are quite effective and facilitate properly the development and stability of their financial markets, while the UK experience in megaregulation turned out to be highly disappointing, though the British FSA once inspired different countries to switch over to the single regulator of the financial market. The British regulator was prone to the excessive red tape and was too soft on "free-ranging" market participants. As a result, the FSA was liquidated after it failed to cope with the financial crisis, and the UK gave up the practice of megaregulation on the financial market.
The financial market in Russia is relatively young and not that developed as in the UK, Germany, Japan and Singapore. As in Germany where there is a single financial regulator, the Russian megaregulator was established as a result of a merger of previous regulators. In both cases, the integration was caused primarily by changes on the financial market, however, in case of Russia there was more criticism - though not that harsh as in the UK and Japan - in respect of the previous regulators, However, despite problems related to the switch-over to the megaregulation of the financial market, the Russian single regulator was established not as a separate authority, but on the basis of the Central Bank, which factor makes it similar to Singapore's MAS. This decision was partially justified by an insufficient level of the legal culture of financial market participants, so a tough regulator was needed for that job and the Central Bank suited that role very well because of its already proven record.
The quality of the financial market depends on multiple factors, including the country's geographical situation, history, legal culture and other. Application of a structural approach alone to the market regulation without other factors taken into account does not necessarily guarantee the proper functioning of the market and may produce negative consequences. These factors create a variety of options within the frameworks of a single model of regulation of the financial market (megaregulation) and predetermine the effectiveness in utilization of the model in different countries.
From September 1, 2013 the Central Bank of the Russian Federation was assigned the authorities to carry out regulation, control and supervision of the entire range of non-credit financial institutions from brokers to pawn-brokers1. It became the megaregulator of the financial market which event signified the beginning of a large-scale institutional reform of the country's financial market. In the past few years, the Central Bank of the Russian Federation has succeeded in carrying out the entire complex of relevant measures:
- removing of unscrupulous participants, primarily in the banking sector, from the market;
- complete reformatting of activities of insurance companies, nongovernment pension funds, microfinance institutions, actuaries and credit rating agencies;
- approval and introduction of the Corporate Governance Code;
- establishment of the system of prudential supervision over the activities of nongovernment pension funds and development of the system of protection of pension assets;
- promotion of protection of the rights of consumers and investors in relations with financial market participants;
- active investigation of instances of market manipulation and insider trading practices; as a result within three years the number of such practices has largely decreased;
- promotion of accessibility of financial products and services;
- facilitation of networking with financial market participants as regards development and regulation of the industry;
- establishment of the new system of regulation of the activities of self-regulating entities on the financial market.
It is worth mentioning the most important issues of megaregulation. The Central Bank of the Russia Federation regulates the activities of the existing market participants, but does not facilitate the attraction of new ones. Regulation is generally meant to create such an environment which would be attractive to those who seek to create new types of business, however, it does not happen so for the time being.
1 See: Federal Law No.251-FZ of July 23, 2013 "On Amendment of Individual Statutory Acts of the Russian Federation in the Context of Assignment to the Central Bank of the Russian Federation of Authorities on Regulation, Control and Supervision over Financial Markets" // RG. July 31, 2013. No.166; Article 76.1 of Federal Law No.86-FZ of July 10, 2002 "On the Central Bank of the Russian Federation (Bank of Russia)" // RG. July 13, 2002. No.127.
It is to be stated that measures aimed at toughening regulation and introducing new forms of supervision do not correlate with costs. Routine behavioral and prudential supervision should not be burdensome for market participants. There are no publicly available calculations of the cost of regulation and supervision.
Supervisory measures in respect of the banks are often applied to the non-banking sector. Unlike banks, non-banking institutions assume lots of risks which are not guaranteed by the state. This suggests that the main instrument ensuring protection of the rights and interests of those investors is complete disclosure of all the existing information. However, there are numerous instances where the Central Bank of the Russian Federation does not pay due attention to the reporting of mutual funds, nongovernment pension funds, brokers and trust managers. On the other side, the information is not sufficiently disclosed, while, on the other side, participants have to submit excessive reporting to the regulator.
Among the identified problems, it is would be expedient to single out the multiplicity of regulation. Let's take, for example, nongovernment pension funds. This segment of the financial market came under control of the megaregulator, however, due to the specifics of the business some aspects of supervision and development of the regulatory base are dealt with by social agencies, while political decisions are prepared by the Pension Fund. In such a situation, an excessive regulatory burden is created.
In upgrading the system of megaregulation in Russia, it is important to take into account the lessons which were drawn in other countries.
It is noteworthy that compliance with "the good regulation principles", such as efficiency and saving, the role of management, adequacy, innovations, global nature of financial services and competition are unable alone to create effective megaregulation without fundamental economic problems being solved. The latter is the priority, but a comfortable business environment, infrastructure, well-balanced taxation, top position in the global doing business rating, supremacy of the law and anti-corruption activities are in no way less important. The sound banking sector and the market with reliable institutional and regulatory systems are vital factors, too.
The main goal consists in overcoming the regulator's red tape which often prevents solution of fundamental issues in the banking sector. The megaregulator's practice of focusing attention on determination of systems and processes, rather than complex business-models and strategies is not often justified. Also, shifting of responsibility for risk management on financial markets onto participants is a problem of megaregulation.
6.3. Science and innovations1
The past year marked the start of drawing up new integrated technological development plans for the Russian science and technology. The plans were originally presented by an Executive Order of the Russian President and then evolved into a nationwide project called "The 'Science' National Project" which is in turn linked to the Strategy for Scientific and Technological Development of the Russian Federation adopted in 2016 as well as a national program called "Digital Economy of the Russian Federation."
In addition to the plans, there were some important organizational changes that led to the ultimate separation of former academic research institutes from the Russian Academy of Science (the Academy) and to the establishment of a single Ministry of Science and Higher Education with authority over institutions of higher education and research-performing organizations, while the Academy was granted the legal status of public expert organization. Other important changes include positive moves towards the development of science in institutions of higher education and more active position of regional government authorities with regard to scientific and technological development. Yet, no breakthroughs or visible changes in technological innovations took place.
Although some system-wide issues facing the Russian science were not addressed in the past year, a basis for positive changes started emerging in some research areas. Public funding continued to account for nearly 70 percent of the total funding of science in Russia - this is an unprecedentedly high level to compare with scientifically developed countries and nations with policies focused on strengthening their scientific base (e.g., BRICS nations). Although business contribution to research and development (R&D) funding remains moderate (representing less than one third of Russia's total R&D expenditure), there is a trend towards higher values in absolute terms. State budget appropriations for science are growing at an outperforming rate amid slim demand for its application in the business sector. Furthermore, R&D expenditure in the Russian business sector are largely (around 60 percent) funded by the state2, surpassing many times R&D expenditure in developed and high-growth countries. As a result, R&D expenditure as a percentage of Russia's GDP remains low (close to 1 percent) amid rising state funding of science. Therefore, there is obvious shortage of mechanisms designed to attract the business sector to funding (co-funding) research and development, with the aim to reduce, at least, the proportion of federal funding that is used as replacement for private funding. It is characteristic that after the 2008 crisis
1 This Section was written by Irina Dezhina, Gaidar Institute, Skolkovo Institute of Science and Technology.
2 OECD (2018), Main Science and Technology Indicators Volume 2018 Issue 1, OECD Publishing, Paris. DOI: 10.1787/msti-v2018-1-en. P.55.
businesses in most of the developed countries became bigger contributors to raising R&D expenditure, while federal funding rose at slower pace1. It is not the case with Russia: business remains a scarce source of contribution to R&D.
Another problem lies in a lack of balanced age structure of researchers. Two opposite age groups developed, one represents young researchers (at the age of 39), whose number has increased considerably in recent years, and another represents older researchers (at the age of over 60). The middle-aged generation of Russian scientists (at the age of 40-59), who are considered more productive, remains a small group (at present, they account for less than one third of the country's total researchers), whose proportion is shrinking. The scientific personnel structure is considered efficient (that is, when best possible results are achieved both in terms of quantity and quality) if young and older generations represent around 20 percent each, and middle-aged researchers constitutes 60 percent2. The second serious issue facing human resources in science is low (both internal and external) mobility of Russian researchers - this is what affects the quality of research outputs.
Another parameter is the material base of science, with only minor changes in terms of quality in recent years. The re-equipment of scientific instruments and equipment has been underway for years; however, federal support is focused more on universities than scientific institutions. Each sector of science has elite organizations that receive more resources than other organizations. However, the elite status of these organizations is not always linked to their research outputs, but rather to formal statuses and some other factors. The re-equipment, however, is faced with the problem of efficient equipment handling, which is given much less attention. As a result, the available equipment is not used as efficiently as it might be, there are no full-fledged core facilities. Some of the up-to-date equipment is underused because it was purchased either on a non-systemic basis or for the purpose of resolving one-time tasks. There are unique units of equipment that duplicate each other. Thus, the issue of optimum utilization of scientific equipment is as much critical as the issue of re-equipment.
Another problematic aspect lies in the quality of research output. A brief record of employing policies aimed at enhancing the performance of scientific workflow in Russia shows that quantitative parameters are given the top priority. That is what accounts for a bibliometric race that has been unfolding in recent years in the country, when the key measure of efficiency and performance in science is the number of published papers rather than the interest in the content of such papers (as measured by the citation rate)
1 Rehm J. Ten Years after the Economic Crash, R&D Funding is Better than Ever. Nature, September 13, 2018. doi: 10.1038/d41586-018-06634-4
2 Balatsky E., Yurevitch M. Modelling academic personnel's age structure // Terra Economicus, 2018, Vol. 16, No. 3, P. 70. DOI: 10.23683/2073-6606-2018-16-3-60-76
by academic and business communities. A point to note, however, is that some universities started to improve in this aspect last year.
6.3.1. Science in institutions of higher education and in public sector
Science in institutions of higher education, as always, continues to represent a small "fragment" of the country's scientific and research complex. Institutions of higher education account for 9.1 percent of the total volume of research and for 12.1 percent of the total number of researchers in this country1. Nowadays, the flagship program is represented by a project called Project 5-100 which is intended to raise the ranking of not less than five Russian institutions of higher education to top 100 global rankings by 2020. There are, however, the "weakest aspects" - the volume and the quality of research - that dampen the climb.
In five years since the Program's inception, quantitative performance measures for science in institutions of higher education have been improved substantially. The number of publication in journals indexed by international data bases has risen due to, among other things, an increase in the number of indexed Russian journals, a substantial increase in the number of university researchers participating in international conferences and study tours to foreign institutes and universities. Therefore, the substantial increase in financial resources has paid off. In particular, the number of papers published by researchers of institutions of higher education participating in Project 5-100 that are indexed by Web of Science have increased 4.5 times compared to 2012, with a 4-fold rise for those indexed by Scopus2. Accordingly, the institutions have strengthened their position by way of upgrading their global rankings, particularly in selected fields of science (Russia, as always, continues to have strong schools of physics, mathematics and astronomy).
However, the race for publication numbers has given rise to many strategies designed to increase rapidly publication numbers. Institutions of higher education participating in Project 5-100 are the major contributors to the race. Analysis of their publication strategies3 reveals the most commonly used strategies (as shown below in descending order of preference (usage frequency)):
• Increasing the number of publications through author affiliation (the author adds the name of higher education institution to the primary place of employment);
• Promoting intensely conferences so that their theses are indexed by Scopus;
1 Science indicators: 2018. Statistical Book. M.: NRU HSE, 2018. PP. 44; 78; 190; 205.
2 N. Bulgakova. Support the promotion. The Academy gets involved in higher education institutions' efforts to enhance competitiveness // Poisk, No. 44, November 2, 2018 http://www.poisknews.ru/ theme/edu/39685/
3 Poldin O., Matveyeva N., Sterligov I., Yudkevich M. 2017. Publication Activities of Russian Universities: The Effects of Project 5-100. Educational Studies, Higher School of Economics, issue 2.
• Seeking and hiring highly cited authors;
• Inviting new researches for publications;
• Having publications in predatory journals.
It is characteristic that publications in predatory journals that are purged from databases is no longer considered as most commonly used strategy.
In the end, measures of quality are still lagging far behind; the citation rate for research papers of institutions of higher education that participate in Project 5-100 is many times less than the average citation rate of reference foreign institutions of higher education, that is, institutions with a similar specialization profile and number of teaching personnel and students. There is still only a small proportion (around 15 percent, according to experts) of academic teaching personnel with research papers published in international journals.
A positive trend is that managers of some institutions of higher education have shifted their focus towards the quality of research papers. Composite measures, including not only publication numbers, were introduced for measuring the performance in research. For example, the Novosibirsk State University pays less for researcher's publications if the researcher does not work with students, and also pays less in financial bonuses for publications that constitute theses of conferences or articles published in predatory journals. Lastly, selection of conferences was introduced, that is, researchers are not recommended to visit low-profile events1. Similar trends can be seen in the National Research University of Higher School of Economics (NRU HSE) and in the Moscow Institute of Steel and Alloys - these universities, for example, pay no bonuses on top of the salary for papers/articles published in third- and fourth-quartile journals.
The public sector, to which former academic institutions now pertain statistically, underwent successful readjustments to meet the new requirements focused on quantitative measures, including publication numbers. Despite the recent restructuring -the integration of former academic institutions, the establishment of centers of various types, etc. - the productivity of "academic science" remained the highest across the country, suggesting that multiyear trends are sustainable enough. According to data for 2017, for instance, while the proportion of articles with Academy's affiliation made up 25.4 percent of the total number of Russian publications indexed by Scopus, the contribution to the total citation accounted for 29.1 percent, with the proportion of authors with Academy's affiliation representing as low as 19.8 percent of the total Russian authors2.
1 S. Ermak, P. Kuznetsov, D. Tolmachev, K. Chukavina. Stop feeding the beast // Expert, No. 20, May 14, 2018 http://expert.ru/expert/2018/20/hvatit-kormit-zverya/
2 Avanesova A., Shamliyan T. Comparative trends in research performance of the Russian universities // Scientometrics, June 14, 2018. DOI: 10.1007/s11192-018-2807-6
It is nonetheless the policy of promoting the development of science in institutions of higher education that serves as a catalyst to not only increase publication numbers but also promote Russian scientific journals to respective databases (basically, Scopus). Russia's Ministry of Education and Science held a contest among scientific journals. One hundred winners were awarded RUB 1 million for development purposes. Around 8000 collected works of conferences were deleted at a time from the Russian Science Citation Index and will no longer be considered for calculating scientometric indicators1.
It is characteristic that the past year was marked by the emergence of a new measure of scientific productivity - h-alpha-index. The author of the Hirsch index, Jorge Hirsch, proposed the h-alpha-index for measuring the number of articles in which a scientist is the principal author (the alpha-author). The alpha-author has the greatest Hirsch index of all the co-authors. The introduction of such index allows one to measure scientists' scientific contribution rather than calculate their overall citation rate2. The new index has restrictions; for example, the Hirsch index for experimenters using sophisticated equipment units, including those that help obtain specimen or make a complex analysis, is often greater than for core authors of a scientific idea. The above manner of identifying the alpha-author leads to incorrect results in this case.
A new paradigm of accessing scientific journals - the obligatory open access - was underway alongside the efforts made to find more accurate measures of scientific productivity. The European Union issued a resolution on Open Access publishing, after which Science Europe presented Plan S3. Plan S requires that, from January 01, 2020, scientific publications that result from research funded by public grants must be published in compliant Open Access journals or platforms. A preliminary set of 14 criteria for selecting journals was proposed. Most of the criteria are linked to technical requirements for open platforms on which journals are based, and only one criterion -the expert evaluation requirement for materials that are proposed for publication - is linked to the quality of publications4. It will cost journals a lot to be able to meet technical requirements. According to a study made5, as little as 15 percent of open-access journals and 3 percent in social sciences now meet the proposed criteria. However, there are undefined parameters, including how non-European universities and research institutions will pay for publications released in journals included in the list.
1 S. Belayeva. There are positive signs. Russian journals move closer to world standards // Poisk, No. 18-19, May 11, 2018 http://www.poisknews.ru/theme/infosphere/35784/
2 J.E. Hitsch. ha: An index to quantify an individual's scientific leadership. Submitted October 3, 2018. https://arxiv.org/abs/1810.01605
3 Plan S. Making full and immediate Open Access a reality. https://www.coalition-s.org/
4 Brainard J. Few open-access journals meet requirements of Plan S, study says // Science, January 31, 2019. https://www.sciencemag.org/news/2019/01/few-open-access-journals-meet-requirements-plan-s-study-says?utm_medium=email&utm_source=FYI&dm_i=1ZJN,63X1U,E29D5V,NZXQM,1
5 Brainard J. Few open-access journals meet requirements of Plan S, study says // Science, January 31, 2019. https://www.sciencemag.org/news/2019/01/few-open-access-journals-meet-requirements-plan-s-study-says?utm_medium=email&utm_source=FYI&dm_i=1ZJN,63X1U,E29D5V,NZXQM,1
The introduction of Plan S implies on the one hand a move towards not subscribing to journals. On the other hand, journals included in the list will have a good and guaranteed portfolio of research papers. The changes will have an effect on Russian authors, at least on those who participate in European scientific programs (EU Framework Programs).
The past year saw institutes of the former academic sector come under the control of the recently established Ministry of Science and Higher Education. the Federal Agency for Research-performing organizations (FASO Russia), which used to supervise academic research-performing organizations, ceased to exist under Executive Order of the President No. 215 dated May 15, 2018 concerning the structure of federal executive bodies1. The Ministry of Science and Higher Education has, under the above Executive Order, a wide mandate to develop and carry out scientific, research and technical and innovation policies; the Ministry now also regulates the daily workflow of both universities and the former academic sector. The Academy was granted a new status -the Federal Law on the Russian Academy of Science was amended in July to enlarge the scope of Academy's authority2. In addition, debates were held during the year to discuss the status and functions of the Academy. However, multiple debates, creating an "information noise", had no effect on research-performing organizations.
The Academy, according to the adopted amendments, will carry out the research and methodological management of scientific and scientific and technological activities of not only research-performing organizations but also institutions of higher education, and carry out an expertise of research outputs in organizations of all types. The Academy will also carry out state-funded research, including on behalf of the Military Industrial Complex (MIC). The Academy will submit annual progress reports to the President of Russia on the implementation of the national scientific and technological policy in the Russian Federation. Thus, the Academy becomes a qualified expert entity for a wide range of issues rather than just the basic science with which it has always been associated. Therefore, the Academy will have to face challenges that are beyond its capacity. Nevertheless, the managers of the Academy believe that the Academy possesses a strong human resource base, including around 2000 corresponding members and Academy members (academicians) and approximately 500 young professors3. However, this is a relatively small number of specialists who will have to carry out an expertise of tens of thousands research topics4 underway in all research-performing
1 http://kremlin.ru/events/president/news/57475
2 Federal Law No. 218-FZ dated July 19, 2018, "On Amendments to the Federal Law "On the Russian Academy of Science, Reorganization of State Academies of Science and on Amendments to Certain Legislative Acts of the Russian Federation.""
3 S. Belyaeva. President of the Russian Academy of Science Aleksandr Sergeev: Call of Duty // Poisk, No. 1-2, January 18, 2019 http://www.poisknews.ru/theme/ran/41116/
4 In particular, in 2018, reports on 11.5K research topics of former institutions of the Academy alone were reviewed. (Source: N. Volchkova. An authorized review. The Russian Academy of Science is all set to embark upon analysis of country's scientific potential // Poisk, No. 1-2, January 18, 2019 http://www.poisknews.ru/theme/science-politic/41115/). The figure would increase by several times
organizations and institutions of higher education where R&D is funded by the state. Furthermore, the Academy will carry out an expertise of not only research topics and research and development outputs but also monitoring and performance measurement of public research-performing organizations, prepare proposals for research institutes and institutions of higher education "with the aim to integrate their scientific potential, develop scientific research and support innovation activities"1. The above functions were defined as the "scientific and methodological management" by the Academy. Additionally, the scope of the management can be enlarged further to cover not only all federal state-funded research and development performing institutions but also institutions where research and development is funded via regional and local budgets: Russian government's Executive Order No. 1781 dd. December 30, 2018 provided recommendations for executive bodies to adopt statutes and regulations whereby the Academy will perform scientific and methodological management of organizations that fall within the scope of its authority, except organizations that were established by the Government of Russia (Moscow State University (MSU), S. Petersburg State University (SPSU), Russian Research Center 'Kurchatov Institute', National Research Center "Zhukovsky Institute", Higher School of Economics (HSE) National Research University, The Russian Presidential Academy of National Economy and Public Administration (RANEPA)). However, managers of the Academy have plans to enter into individual agreements with the above organizations on scientific and methodological management2.
A more detailed analysis of how the Academy is going to perform its scientific and methodological function reveals that deadlines for analysis and decision-making may be quite extended because, for example, if institutions of higher education work on various research topics, then the same institution would be supervised at a time by various branches of the Academy. Thus, this would be subject to more approvals within the Academy. In so doing, the Academy's evaluation is cause for making adjustments to topics of research: if the Academy believes that funding of certain topics is undesirable, then the topics can be refined and then reapproved upon re-consideration by the Academy, or if the Academy does not reapprove these topics, then funding would be discontinued. And this despite the fact that draft forms developed for evaluation of topics allow for a formal enough expertise because they do not require detailed conclusions.
when including reports of institutions of higher education and business sector organizations on state-funded research works.
1 C.3 of the "Rules for the Federal State-funded Institution Russian Academy of Science to perform scientific and research and methodological management of scientific and scientific and technological activities of research-performing organizations and educational organizations of higher education as well as expertise of scientific and scientific and technical outputs delivered by these organizations", endorsed by Russian Government's Executive Order No. 1781 dated December 30, 2018.
2 N. Volchkova. An authorized review. The Russian Academy of Science is all set to embark upon analysis of country's scientific potential // Poisk, No. 1-2, January 18, 2019. URL: http://www. poisknews.ru/theme/science-politic/41115/
The above changes place an extra burden upon research-performing organizations and institutions of higher education because a unique reporting form must be used for each topic, whether it is funded or planed to be funded by the state. Since public funding accounts for 70 percent of the total funding in the country's scientific complex, the "avalanche" of reports and expertise can hardly be imagined. The existing scheme is yet far from being balanced: besides having the opportunity of making a formal evaluation, the Academy is deemed to bear no responsibility for decisions it makes - at least, no such responsibility follows from the official documents that have been available to date, except a provision on deadlines for the Academy to consider a series of issues which, however, have nothing to do with the expertise of research topics. The Russian Government issued on December 24, 2018 an Executive Order which lays down rules for cooperation between the Academy and the Ministry of Science and Higher Education, sets tight enough deadlines for the Academy to agree upon decisions on reorganization and liquidation of research-performing organizations, on making amendments to charters, on the approval by the Presidium of the Academy of nominees for heads of research-performing organizations and on the approval by the Academy President's of decisions to terminate the office of heads of research-performing organizations1. The Academy must make decisions within 5 working days to 30 calendar days, depending on what exactly needs approval.
New functions of the Academy are given a relatively moderate funding: around RUB 4.2 billion of budget allocations to the Academy are planned for 2019-2021(within the framework of the National Program "Scientific and Technological Development of the Russian Federation"), of which RUB 2.3-2.4 billion will cover daily operations such as, presumably, expert and monitoring activities (see Table 20). The Academy also expects to receive RUB 1 billion from the federal budget for its scientific and methodological management of all research-performing organizations and institutions of higher education in the country2, which has not been denied by the state.
The Academy embarked by late in the year upon an initiative aimed at cooperation with various state departments. The Academy first of all expressed its willingness to cooperate with the Ministry of Science and Higher Education in order to raise the ranking of leading institutions of higher education in global rankings3. It is unclear, though, how the Academy is going to contribute to the promotion, but it will most likely
1 Russian Government's Executive Order No. 1652 dated December 24, 2018 "On Approval of Rules for the cooperation between the Federal State-funded Institution Russian Academy of Science and the Ministry of Science and Higher Education of the Russian Federation while exercising their authority under the Federal Law "On the Russian Academy of Science, Reorganization of State Academies of Science and on Amendments to Certain Legislative Acts of the Russian Federation.""
2 The Academy applies for RUB 1 billion to establish the framework for institutions of higher education and since promotion // RBC, November 13, 2018. URL: https://www.rbc.ru/rbcfreenews/ 5bead0fb9a794784ff42fea0
3 The Academy is ready to cooperate with the Ministry of Education and Science to raise the ranking of Russian institutions of higher education in global rankings. October 28, 2018. URL: https://tass.ru/obschestvo/5730212
limit its efforts to paying a few visits to leading institutions of higher education. The initiative did not find support by institutions of higher education, as was expressed explicitly at a November 27 meeting of the Presidential Council for Science and Education1. The negative can be adequately explained by the ongoing "confrontation" between the parties. What is more, it is the Academy that quite often criticized institutions of higher education. In particular, President of the Academy Aleksandr Sergeev noted that universities started competing with each other in the field of science instead of training specialists, that is, what they are supposed to do as part of their core activity2.
Table 20
Budget appropriations to Russian Academy of Science (a federal state-funded institution) in 2019-2021, RUB billion
Type of expenditure 2019 2020 2021
Total 4.2 4.2 4.3
Including operational expenses (provision of services) of public institutions 2.3 2.3 2.4
National awards in literature and arts, education, print media, science and techniques and other awards for meritorious services to the state 1.9 1.9 1.9
Source: Schedule 8 to the Explanatory Note attached to the Federal Draft Law regarding the Federa Budget for 2018 and the 2020 and 2021 Planning Period.
Late in the year, the President of Russia criticized indirectly the Academy by pointing to the fact that it is not unusual when basic research topics remain the same for decades, with no outputs delivered. "Not a single research paper with coverage in any citation database has been issued" with regard to 40 percent of research topics underway in academic institutions. In other words, it appears that either there are no outputs at all, or there are outputs that are irrelevant." However, since the Academy ceased to supervise research institutions five years ago, the responsibility for the above output is attributed not only to the legacy of the academic past but also to FASO Russia. In addition, the President criticized the fact that the 2017 performance measurement of the former academic research-performing organizations, including their division into three categories, failed to have led to any organizational and financial changes. The critique should rather be addressed to the Ministry of Science and Higher Education as the successor of FASO Russia.
Overall, managers of the Academy are in optimistic mood: according to the Academy's President, there is no other entity but the Academy that can provide an independent and nonpartisan expertise in the field of basic and applied research underway in the country. Yet, there is no solid ground for the optimism. The Academy has not carried out assessments of the time input in all of its "scientific and
1 The verbatim records of a meeting of the Presidential Council for Science and Education. November 27, 2018. URL: http://kremlin.ru/events/president/news/59203
2 The President of the Russian Academy of Science notes a decline in the knowledge and skills of graduates from Russian universities // RIA Novosti, May 25, 2018. URL: https://ria.ru/ society/20180525/1521320822.html
methodological tasks", given the average speed of works performed in the Academy1. Additionally, there are no guarantees that members of the Academy can provide an expert evaluation of any research topics. No "research performance" measurement has so far been applied to Academy members and corresponding members, on top of that they enjoy some privileges for their publication activities, including, for example, the right to publish non-reviewed articles in an academic journal called "Russian Academy of Science Reports" (RASR)2 and also they are allowed to use such articles for the purpose of grants and public assignments. Therefore, the question of how the Academy is to exercise in full the function of country's key expert in science still remains open.
6.3.2. New focus areas for national policy and national project for science
New focus areas of the national policy in the field of science were outlined in the Presidential Address to the Federal Assembly, initiating for the first time the linkage between "powerful infrastructure - talent acquisition and support to young people -research within research and educational centers"3. The same focus areas were recognized in an Executive Order of the President later in May4, commissioning the Russian government to develop the 'Science' National Project, which is to achieve the following goals set forth in the Executive Order:
• To raise Russia's ranking to world's top 5 nations that perform research and development within the scope of focus areas of scientific and technological development;
• To ensure that scientific research in the Russian Federation is appealing for Russian and foreign top scientists and young high-potential researchers;
• To ramp up local R&D inputs using all sources, so that they outperform growth rates in the gross domestic product.
A few objectives were formulated to achieve the foregoing goals: to establish an advanced infrastructure for research and development, to re-equip not less than 50 percent of instruments used by leading organizations that perform research and development, to establish scientific centers of various types.
The 'Science' National Project (SNP) became part of a new state program called "Scientific and Technological Development of the Russian Federation." Despite the fact
1 A. Mekhanik. The Academy becomes key expert in science // Expert, No. 5, January 28, 2019. URL: http://expert.ru/expert/2019/05/ran-stanovitsya-glavnyim-nauchnyim-ekspertom/
2 V. Vdovin. Privileges offer benefits. Why does RASR publish non-reviewed articles // Poisk, No. 5, February 01, 2019. URL: http://www.poisknews.ru/theme/ran/41373/
3 Presidential Address to the Federal Assembly. March 01, 2018. URL: http://kremlin.ru/ events/president/news/56957
4 Russian President's Executive Order No. 204 "On National Goals and Strategic Tasks of the Development of the Russian Federation until 2024", dated May 7, 2018. URL: http://kremlin.ru/acts/bank/43027
that the State Program itself will not be endorsed until April 1, 20191, the SNP gave rise to active debates back in late 2018. The project has the same three main objectives that were set forth in the Executive Order of the President.
The first objective is to raise Russia's ranking to world's top 5 leading nations that perform R&D in focus areas of growth (as identified in the Strategy for scientific and technological development of the country). The achievement of this objective will be measured exclusively through rankings, which may lead to false incentives. In particular, there are plans to raise the number of scientists in order to retain 4th place in international rankings regarding research personnel numbers, including plans to double publication numbers in order to move up in rankings.
The second objective is to make Russia appealing for Russian and foreign scientists as well as young researchers. However, the appeal will be measured by the number of foreign scientists working in Russian organizations regardless of the duration of their stay in the country rather than by enhancing the scientific workflow management, ensuring career tracks, inviting foreign scientists under long-term contracts (more than three years). If the duration of stay in Russia is of no importance, then "boosting" the number of foreign scientists would be no hardship. The second measure is precarious enough - there are plans to raise the number of researchers aged 39 or younger to 50.1 percent of the total number of researchers in the country - which may worsen the imbalance in the age structure of scientific personnel. It would be more appropriate for increase in the proportion of middle-aged (40-60) generation of researchers to be set as indicator, because any increase in this cohort would indicate that young individuals stay in science.
The third objective is to ramp up all R&D inputs using all available sources, in which case it would be more important to ramp up business sector's R&D inputs at outperforming growth rates, create a demand for research outputs. However, funding is expressed in a more softer manner in the SNP than even in the Strategy for Scientific and Technological Development of the Russian Federation with parallel funding as a goal. A little more than RUB 636 billion, including RUB 405 billion through state budget funding and around RUB 231 billion via extrabudgetary funding (that is, 36 percent of total inputs in the national project), are planned to be spent in 6 years (from 2019 to 2024) to implement all the activities that are to take place within the SNP framework.
The above objectives are planned to be achieved by implementing three projects: (1) to develop scientific and scientific-industrial cooperation, (2) to create an advanced infrastructure, and (3) to develop human resource potential. The state budget to extrabudgetary funding ratio for the total of three projects in 2019-2024 is presented in
Table 21.
Known methods are expected to be applied for developing scientific and scientific-industrial cooperation: establishing various types of research and educational centers
1 A meeting of the Presidium of the Presidential Council for Strategic Development and National Projects. December 17, 2018. URL: http://government.ru/news/35104/
(RECs). Many various types of RECs, including both scientific and scientific-industrial RECs, have been established over the past 20+ years. This time, however, RECs constitute units that are much more bigger in size.
Table 21
Funding plans for federal projects as part of 'Science' National Project, 2019-2024
Federal project Total funding, RUB billion State budget funding, RUB billion Extrabudgetary funding, RUB billion Proportion of extrabudgetary funding, percent
Development of scientific and scientific-industrial cooperation 215.0 57.3 157.7 73.3
Development of advanced infrastructure for research and development in the Russian Federation 350.0 276.6 73.4 21.0
Development of human resources in research and development 70.9 70.9 0 0
Source: 'Science' National Project's data sheet (according to data available as of February 11, 2019).
Debates on what RECs should be are still in progress, involving a broad variety of opinions. The President of the Academy believes that RECs should be established on the basis of existing research-performing organizations or educational institutions and equipped with modern equipment and managed by an international supervisory board. His opponents believe that RECs should be linked to industries and intend to address tasks facing a specific territory. Furthermore, there is no good understanding of whether RECs should constitute a legal entity, a structural unit within a legal entity, or a team comprised of persons from different organizations. Also, neither is there understanding of criteria to identify leading organizations that can be qualified for the REC status. Whether it is only standard statistical parameters (publications, patents, etc.) that should be considered, or expert evaluations should be included as well?
According to the data sheet to the Federal Project on "Development of scientific and scientific-industrial cooperation", there are plans to establish various types of RECs by 2024, including:
1. Not less than 15 world-class RECs through integration of universities and research institutes with enterprises. Such RECs can be established on a sector- or region-specific basis.
2. World-class international research centers, including a network of mathematical centers and genomic research centers - 3 genomic centers, 4 mathematical centers, 9 international centers according to the focus areas set forth in the Strategy for Scientific and Technological Development of the Russian Federation. It is a must for the above centers to attract young researchers, and key performance measures must include papers published in peer-reviewable journals.
3. Fourteen National Technological Initiative competence centers (NTI competence centers).
REC's specific features, such as the presence of world-class scientific infrastructure, partnership with real sector organizations, regional government's support, are under discussion. In particular, some experts opine that it is RECs that may come to participate
in the implementation of megascience projects. It is assumed that the key aspect in selecting organizations as the base for RECs will not be organization's type and characteristics but rather the interdepartmental nature of projects, however, if broadly interpreted, RECs must include science, education, industrial cooperation, and they altogether should promote territorial development. So far, the concept of "new REC" is therefore closest to the concept of federal university, which also provides for all types of cooperation, plus there is commitment to achieve regional goals. RECs no doubt differ from the other category of centers - world-class international centers - first of all in that the latter perform applied works.
Unlike RECs, an NTI competence center is a structural unit rather than an organization, which is established on the basis of research-performing or educational organization, whereas the NTI competence center constitutes a consortium of research-performing, educational and industrial organizations. It develops technological solutions for NTI cross-cutting technologies, and therefore a key reporting indicator for such a center would be the number of created technologies that are applied in the industry. Fourteen competence centers for cross-cutting technologies were set up back in 2018, funded by the Russian Venture Company. In fact, competence center consortiums have already started compiling a pool of projects.
According to the advanced infrastructure development project, there are plans to upgrade at least 50 percent of the instruments of leading organizations on top of the known objectives of constructing megascience units. The issue of enhancing the equipment utilization efficiency has not been raised, and focus areas are yet to be identified. For example, Russia has in recent years been lagging far behind countries that have the biggest number of high performance supercomputers. The presence of supercomputers in a country exhibits its data processing capacity. Supercomputers are employed in scientific research, aviation, healthcare, industry. Russia has two supercomputers and ranks at the bottom of the list of top 500 producers of supercomputers, whereas China (with 202 supercomputers), the United States (with 143 supercomputers) and Japan (with 35 supercomputers) rank on top of the list. Russia has no its own base of computer components needed for manufacturing supercomputers, which may further degrade the county's capacity amid sanctions because Russian supercomputers rely on US-made processors1. Perhaps, focus types of most expensive and unique units that need to be developed through state budget funding should be identified.
The third project focuses on supporting young people, being in line with the SNP's target. As noted above, this approach is precarious due to a threat of unbalancing the age structure of scientific personnel. Another point to note is that the SNP provides no factors that might make science appealing and relevant to young people. Furthermore, plans to increase substantially the publication feedback may discourage rather than motivate young people into science.
1 Mamedyarov Z. America conquers the summit // Expert, No. 26, June 25, 2018. URL: http://expert.ru/expert/2018/26/amerikantsyi-pokorili-vershinu/
There are plans within the framework of the same project to continue attracting top foreign specialists and to work with the Russian-speaking scientific community. New quantitative and qualitative targets set forth in the Science SNP can produce a need to revise a few initiatives that are currently taking place. In particular, a megagrants program (grants for establishing laboratories in research institutes and institutions of higher education under the auspices of world's top scientists, including representatives of the Russian-speaking scientific community) is still underway, but its format is somewhat obsolete in the light of new objectives such as, for example, doubling the publication activity. The program's requirements for publication numbers are too soft now compared to what they were at the 2010 onset of the program, while there were no quality requirements for research outputs whatsoever. Should this program become part of the national project, then the selection criteria for projects, not to mention reporting, should be revised and updated.
Cooperation with the Russian-speaking scientific community becomes more difficult amid sanctions. On the one hand, Russian-speaking scientists do show interest in cooperating with Russia, particularly with its more organized segments - from RASA and RuSciTech1. In particular, they offer assistance in enhancing the quality of scientific expertise2, developing Russian scientific journals. All these functions are important functions, and external expertise not only by Russian-speaking scientists is of great importance. There are other efforts - a few Russian universities launched interesting initiatives aimed at attracting Russian-born specialists. For example, the Siberian Federal University (SFU) has a program called Foreign Professor (funded through Project 5-100) designed to invite for a short term top foreign specialists as researchers and teachers. So far, all of the invited persons are Russian-born foreign specialists3. The new National Project, however, should also consider the fact that representatives of the Russian-speaking scientific community are yet not prepared to participate in projects that require them to stay long term in Russia, not to mention their returning back to Russia. For instance, according to a study of Boston Consulting Group, only 6 percent of professionals who emigrated to the Western Europe said they are ready to work in Russia4.
On the other hand, there are external factors that may constrain the development of relationship with Russian-speaking scientific communities in foreign countries. In particular, the unfolding U.S. policy aimed at shutting off outflows of important scientific and technological information to China has an adverse effect on China's project called National "Thousand of Talents Program" designed to attract scientists.
1 RASA is Russian-speaking Academic Science Association. URL: (https://www.dumaem-po-russki.org), RuSciTech is an international association of Russian-speaking science and technology professionals living outside Russia. URL: (http://ru-sci-tech.org/ru/).
2 Building bridges // Troitsky option - science, No. 267, November 20, 2018, P.4.
3 A project called Foreign Professor kicked off at the Siberian Federal University (SFU). June 21, 2018. URL: http://about.sfu-kras.ru/rating/5top100/news/20499
4 Half of Russian scientists say they want to emigrate. June 27, 2018. URL: https://www.finanz.ru/ novosti/aktsii/polovina-rossiyskikh-uchenykh-zayavili-o-zhelanii-emigrirovat-1027322119
The next step was focused on similar programs of other countries. At present, legislative amendments are under consideration in the United States, whereby scientists participating in China's, Russia's and Iran's talents programs (megagrants programs as well as initiatives aimed at establishing international laboratories within the framework of Project 5-100 fall under this definition in Russia) shall not be entitled to grant-based funding from the U.S. Department of Defense and possibly from grant-based programs of other federal agencies.1 The U.S. Department of Energy enforced a requirement early in 2019 whereby scientists/researchers who are participating or have plans to participate in Russia-funded projects must report to their senior managers. Accordingly, those who continue their participation in such programs will be advised to quit such programs or otherwise resign from U.S. public laboratories. Therefore, the number of Russia-born scientists interested in cooperating with Russia and working for public organizations is likely to be reduced in the offing.
Analysis of the composition of three federal projects as an attempt to apply a comprehensive approach to address science related issues leads to a conclusion that the focus on the relationship between science and real sector is restricted by a narrow segment related to the establishment of RECs and NTI competence centers. Overall, science remains a "thing in itself', being out of touch with economic problems and led, more than ever before, by rankings.
What is also worth noting is that development projects just indirectly consider the influence factor of sanctions although they appear to be long-term. The impact of sanctions on science let alone technologies has so far been underestimated. The problem is recognized just indirectly, resulting in more frequent discussions about since as soft power and as a factor of positive influence and maintaining relations amid unfavorable geopolitical situation.
6.3.3. State budget funding of research and development
The past year saw public funding of research and development continue to increase, and the trend is expected to continue down the line. There are plans to increase substantially allocations in 2019-2021 to non-defense research and development compared to target appropriations in 2018-2020. Public funding in 2019-2021 will rise at 2-12 percent a year (see Table 22).
There is a positive trend towards funding of knowledge-based programs. For instance, the third most important R&D expenditure is now a program called Development of Healthcare (see Table 23), with a substantial increase in allocations relative to previous years' budget plans. This is a critical socio-economic area that was previously given insufficient attention as part of R&D, particularly when compared with developed countries.
1 Y. Sharma. Panic over US scrutiny of science talent programme // University World News, October 18, 2018, no.525. URL: http://www.universityworldnews.com/article.php?story=20181018183445307
Table 22
Dynamics of allocations for non-defense research and development
Indicator 2019 2020 2021
Federal budget expenditure on non-defense R&D, total, RUB billion 408.12 442.04 452.79
Year-to-year growth, percent +12.7 +8.3 +2.4
Growth compared to the draft law for 2018-2020, each year, percent +16.2 +1.2 -
Source: Schedule 8 to the Explanatory Note attached to the Federal Draft Law regarc ing the Federa
Budget for 2018 and the 2020 and 2021 Planning Period; own calculations.
At the same time, expenditure on the development of electronic and radioelectronic industry remain relatively moderate, which poorly fits into plans on digitization and competitiveness in technological areas that are relevant for the national defense. There is a somewhat alarming trend towards further concentration of resources in a few programs, suggesting feeble prospects for raising funding in other areas.
In terms of the structure of expenditure by type of research - basic and applied research - there are plans to raise allocations for basic scientific research, so that by 2021 they account for 47.7 percent of total expenditure on non-defense scientific research and development.
Table 23
Dynamics of allocations for scientific research and development to national programs with biggest funding of research and development (RUB billion)
State Program 2018 2019 2020
Scientific and Technological Development of the Russian Federation 210.8 230.7 248.3
Space industry in Russia, 2013-2020 68.1 64.4 61.4
Development of healthcare 39.8 49.1 50.8
Development of aircraft industry, 2013-2025 36.6 44.8 39.8
Proportion of four programs in total allocations for non-defense R&D, percent 87.1 88.0 88.4
For reference: inputs in the program for "The Development of the Electronic and Radioelectronic Industry for 2013-2025" 9.1 9.7 9.7
Source: Schedule 8 to the Explanatory Note attachec to the Federal Draft Law regarding the Federal
Budget for 2018 and the 2020 and 2021 Planning Period; own calculations.
This conforms the level of European countries with the most developed scientific complex (France, UK). At the same time, the proportion of grant-based funding through two public scientific foundations - The Russian Science Foundation (RSF) and The Russian Foundation for Basic Research (RFBR) - will increase at a slower rate than allocations for basic research (see Table 24).
At present, grant-based funding by the foregoing foundations is far less than that in developed countries, accounting for 10.5 percent of total non-defense science spending, including that it will slide by 2021 to 10.1 percent. This is fuelled by the problem of "erosion" of foundations' programs, a decrease in the proportion of programs focusing on supporting research topics that are initiated by scientists. In particular, there is an excessive bias towards supporting young scientists whose participation in scientific projects is compulsory (a fixed proportion of young scientists shall be observed).
Table 24
Changes in volume of state budget allocations for basic research
Type of expenditure 2019 2020 2021
Basic research (subsection, Functional Classification of Costs (FCC)), RUB billion 179.4 199.5 215.9
Proportion in total expenditure on non-defense R&D, percent 44.0 45.1 47.7
Russian Foundation for Basic Research (RFBR) 22.2 22.9 23.9
Russian Science Foundation (RSF) 20.8 21.3 21.9
Proportion of RFBR and RSF in basic research expenditure, percent 24.0 22.2 21.2
Sources: Schedule 10 and Schedule 13 to the Federal Draft Law regarding the Federal Budget for 2018 and the 2020 and 2021 Planning Period; own calculations.
The problem of grant-based funding lies also in heightened focus on quantitative performance measures in the form of strict requirements for the number of publications to be issued while performing grant-funded research. Plans for quantitative measures are considered during examination of applications for projects. However, such requirements make no guarantee of quality of research outputs. In this respect, there is a counter example - The European Research Council (ERC), one of the most successful funder in the EU. The ERC was established in 2007 with the aim to promote scientific research on topics that are suggested by scientists. There are no "pressing topics/themes" or lines of research contributing to responses to "grand challenges." The sole evaluation criterion for applications for projects is the quality of research, excluding grant seekers' scientometric data. The outcome is that ERC-funded research were awarded six Nobel Prizes and Wolf Foundation Prizes, three Fields Medals1. Things will possibly change in Russia too. As was noted at the most recent meeting of the Presidential Council for Science and Education, grants are yet to become catalyst to science development in Russia, and that topics for grand-funded research should be suggested by scientists2.
6.3. 4. Regional aspects of scientific and technological development
Two objectives - "technological breakthrough"3 and spacial development - were simultaneously announced past year4, which can set a new vector for the scientific and technological policy in Russia's regions. Prior to the announcement, innovation clusters were created at the regional level upon initiation of the federal government, "smart specialization" was determined, the construction of "smart cities" was commenced. The focus now will shift towards accomplishing the tasks of implementing the 'Science'
1 A. Vaganov. The principle of research bottom-up funding in the European Union // Nezavisimaya gazeta - science, May 23, 2018. URL: http://www.ng.ru/nauka/2018-05-23/10_7230_eurosouz.html
2 The verbatim records of a meeting of the Presidential Council for Science and Education. November 27, 2018. URL: http://kremlin.ru/events/president/news/59203
3 Putin says Russia needs technological breakthrough. TASS, April 26, 2018. URL: http://tass.ru/ekonomika/5161633
4 Putin offers to develop a special development program for Russia. RBC, March 1, 2018. URL: https://realty.rbc.ru/news/5a97ca8a9a79475d3e2a6447
National Project, including the establishment of RECs. It is understood that the Ministry of Science and Higher Education will establish and maintain relationship with regions in order to implement the National Project1. Although the project is yet to be endorsed, the work is underway to develop REC establishment concepts, involving regional government administrations of Krasnoyarsk, Tomsk, Novosibirsk, Irkutsk, the Altai Krai, Yakutsk and Tyumen.
Regional policies tend to pursue three goals. The first one is to identify focus areas of technological development that are not necessarily required to fall in line with respective focus areas at the nationwide level (it cannot be ruled out that academicians further translated this very component into the concept of "smart specialization"). The second goal is to coordinate between key stakeholders the critical elements of the policy in place. The third goal is to establish links between all the elements within the regional innovation framework in order to foster the development and transfer of technologies2.
There was much debate last year about a "smart cities" agenda as part of new focus areas of regional scientific and technological development. The Russia Digital Economy Program 2017 (DEP), followed by the Presidential Address to the Federal Assembly on March 01, 2018 and, lastly, the Executive Order of the President ofMay 7, 2018 concerning national objectives and development strategic tasks, raised the issue of "smart cities" to the top-priority level of the federal technological development policy. Initiatives at the regional level are therefore expected to appear. The progress in this area can in part be seen through growing number of media publications about the creation of "smart cities" or their elements in Russia's regions. It is characteristic that a 3-year-old survey of the NRU HSE3 showed that one of the key constraints to the promotion of "smart cities" in Russia is lukewarm support by regional and federal government authorities, being the reason for lack of incentives at the municipal level. Now there is an incentive. Moreover, it is the technological aspect that will most likely dominate, whereas the "managerial" approach aimed at aligning interests of all stakeholders will appear to be the weakest aspect. At least, it is the lack of consensus that has always been a "weakness" of the Russian innovation framework. According to foreign specialists, from the technological perspective it is important to address information security issues when creating "smart cities", while from the social perspective it is important to keep in mind the issue of inclusiveness, which means that there should be no categories of people that are not
1 The verbatim records of a meeting of the Presidential Council for Science and Education. November 27, 2018. URL: http://kremlin.ru/events/president/news/59203
2 K. Koschatzky and H.Kroll (2007). Which Side of the Coin? The Regional Governance of Science and Innovation, Regional Studies, Vol.41.8, pp.1117-1118.
3 It was held in 2015. Source: Boikova M., Ilyina I., Salazkin M. A "smart" model of development as a response by cities to challenges // Foresight, 2016, Vol. 10, No. 3, P. 71.
involved in the life of a "smart city" (because, for example, elder people experience difficulties when mastering online services)1.
Another point to note is that all the subjects of the Russian Federation have raised their digitization budget expenditure, with leading regions focusing first of all on funding the creation of "smart cities", while lagging regions on the development of selected types of services for individuals2. However, the shortage of funds in regional budgets as well as limited number of skilled personnel for accomplishing digitization remain a serious problem. To date, revenues have been redistributed between federal/central government and subjects of the Russian Federation in favor of the government. That is exactly why regional government authorities are highly interested in being involved in implementing federal initiatives in science and technologies, because doing so can open an extra source of funding to regions. In addition, regional government authorities are limited in their capacity and in distribution of areas of responsibility: the majority of universities and research institutions are owned by the federal government. Focusing on supporting high-tech companies in this context appear to be one of the most adequate and reasonable solutions alongside any initiatives aimed at establishing relations. Such processes are already in progress in Russia's regions such as Tomsk, Irkutsk, Novosibirsk Oblasts.
There is a stand-alone initiative for regional scientific and technological development - a Novosibirsk Scientific Center's project called Akademgorodok 2.0 (Russian: "Academic Town"). Akademgorodok 2.0 is comprised of 31 subprojects, including the most resource-intensive subprojects such as the construction of a synchrotron - the Siberian Ring Source of Photons (SKIF) - and the establishment of two national centers for high performance computing and genetic technologies. The project Akademgorodok 2.0 is estimated at RUB 500 billion (of state budget funding)3. None of the 31 subprojects, except SKIF, have so far been guaranteed funding from the funds allocated to the 'Science' National Project (the megaunit is estimated at RUB 40 billion)4. The decision to construct SKIF was made in February a year earlier by the Presidential Council for Science and Education. Besides public funding, local government authorities are banking on funding from the private sector which might be interested in developments of scientific centers integrated in Akademgorodok.
1 Michinaga Kohno: "Innopolis is an outdated model which should have been implemented 30 years ago." April 12, 2018. URL: https://realnoevremya.ru/articles/95516-intervyu-s-michinaga-kohno-ekspertom-po-umnym-gorodam
2 T. Kostyleva. A full version of regions rated by the development of digitization "Digital Russia" has been released. November 20, 2018. URL: http://d-russia.ru/vyshla-polnaya-versiya-rejtinga-regionov-po-urovnyu-razvitiya-tsifrovizatsii-tsifrovaya-rossiya.html
3 Half a trillion rubles. For real breakthrough // Expert, No. 40, October 1, 2018. URL: http://expert.ru/expert/2018/40/poltrilliona-rublej-za-nastoyaschij-proryiv/
4 B. Kork. Akademgorodok. Reloading // Expert, No. 40, October 1, 2018. URL: http://expert.ru/expert/2018/40/akademgorodok-perezagruzka/
However, there is no single view of how Akademgorodok should develop, and there is a sum of projects at various stages of maturity rather than a new development model. The above as well as rapid and closed nature of the concept development are the reasons why Akademgorodok 2.0 has been heavily criticized by external and local experts1.
6.3.5. Technological development
There were no breakthroughs in technological innovations. Overall, the level of companies' innovation activities remained low in all sectors: the proportion of industrial enterprises involved in technological innovation stood at 9.6 percent, posting a decline from the proportion seen amid sanctions in 20142. There are other assessments, mostly expert ones, of the level of innovation activities, showing that the proportion of innovation-active companies stood at 15-20 percent3. This figure, however, is one half as high as that recorded by nations with the developed technological base.
Also, a decline to 8 percent (from 9.5 percent in 2014) was seen in the proportion of companies involved in technological innovation in the area of information and communication technologies (ICT). Moreover, there was a decline in corporate venture deals in the IT industry. Investments in 2018 were estimated at USD 151.3 million, much less than the amount (USD 246.6 million) recorded in 20174. Furthermore, analysis of IT-startups engaged in deals with corporations showed that the majority of purchased startups were startups whose founders were former co-owners and senior managers of medium-sized and big IT-companies, managers of IT-units and former corporate managers. At the same time, software exports continued to advance because, among other things, flagship companies swiftly refocused to new markets5. The 2018 year-end exports ran at more than USD 10 billion, twice the amount registered five years ago6. Furthermore, exports started outpacing sales in the domestic market.
1 See, for example, a detailed analysis of the project's weaknesses: S. Smirnov. 'We moving backwards." Humanitarian expertise of Akademgorodok 2.0 project. February 06, 2019. URL: https://tayga.info/144882
2 Fridlyanova S. Innovations in Russia: Key measures dynamics. Express information "Science, technologies, innovation". M.: NRU HSE, September 26, 2018. URL: https://issek.hse.ru/data/2018/ 09/26/1153998102/NTI_N_103_26092018.pdf.pdf
3 Butrin D. "We have managed to launch a few technologically active sectors" // Kommersant, No. 55, December 03, 2018 P. 4. URL: https://www.kommersant.ru/gallery/3814084
4 Y. Ammosov, A. Levashov. Corporate ventures in Russia's IT industry. TAdviser study. November 19, 2018. URL: http://www.tadviser.ru/index.php/Crarba:HccnegoBaHHe_TAdviser_ «KopnoparHBHbiH_BeHHyp_B_MT-HHgycTpHH_PoccHH»
5 For example, Kaspersky Lab's global sales proceeds have increased in the face of European and U.S. sanctions by virtue of refocusing on markets in CIS countries, Africa and the Middle East. Source: M. Maiorov. Hacker's nightmare. URL: https://stimul.online/articles/kompaniya/strashnyy-son-khakera/
6 Growth program: Russian software sales abroad top all-time highs // Expert, No. 7, February 11, 2019. URL: http://expert.ru/expert/2019/07/programma-rosta-prodazhi-rossijskogo-softa-za-rubezhom-byut-rekordyi/
Overall, H1 2018 saw transactions in the venture market drop in numbers as cumulative investment rise. This could be a sign of investors increasingly opting for conservative investment in "reliable" companies, as also evidenced by changes in preferred industries, such as contraction in the proportion of biotechnologies and increase in the segments of e-commerce, logistics and transport1.
The tools in use to encourage technological development have so far had insufficient effect on all types of companies, including big, medium-sized and small companies. According to a report of consulting firm A.T. Kearney, Russia has lost dynamics of its industrial development (Industry 4.0) due to, first of all, immaturity of both the institutional structure and the development of technologies and innovations2.
Also, there are policies focusing on the promotion of cooperation between companies and research-performing organizations and institutions of higher education, and on R&D outsourcing to companies. For example, innovation development programs running since 2010 at big companies with government equity participation are supposed to have a compulsory component such as cooperation with institutions of higher education. Despite the fact that companies allocated their resources for the purpose, more often there was no cooperation, but rather a sort of co-funding of research performed by institutions of higher education whose outputs were by no means always in demand. To date, as little as 3 percent of scientific projects of institutions of higher education have been implemented to the benefit of business companies, according to data from NRU HSE's education economics monitoring 20 1 83. Therefore, there was neither visible growth in patent activities, nor any serious increase in exports of technologies, expansion of the country's segment of small and medium-sized innovative companies. Products manufactured by non-energy small and medium-sized enterprises were marketable mostly in the domestic market, as evidenced by a small proportion of exporters, particularly when compared with innovation-led developed countries (see Table 25).
Analysis of the performance of public support instruments showed that the highest positive effect was due to Innovation Promotion Fund's programs4.
1 Focus on Internet users // RBC, November 06, 2018. URL: https://www.rbc.ru/technology_and_ media/06/11/2018/5bdc51819a79472f04cb2f46?from=main
2 Readiness for the Future of Production Report 2018. WEF in Collaboration with A.T.Kearney. URL: http://www3.weforum.org/docs/F0P_Readiness_Report_2018.pdf
3 Andruschuk. Science and business // Kommersant, August 13, 2018. URL: https://www. kommersant.ru/doc/3712714
4 The National Report on Innovations in Russia 2017. Ministry of Economic Development, Open Government, RBC, 2018.
Table 25
Proportion of exporters of non-energy commodities in small and medium-sized enterprises
Country Proportion of exporters in small enterprises, percent Proportion of exporters in medium-sized enterprises, percent
Russia 10.0 9.6
France 50.7 86.5
Hungary 53.3 78.6
Germany 42.5 69.2
U.S.A. 27.5 58.7
Source: Microeconomics of exports. Rating of Russian biggest exporters. Special report. // Expert, No. 39, September 24, 2018 URL: http://expert.ru/expert/2018/39/mikroekonomika-eksporta/
The rest of the instruments, according to experts, had a minor effect in recent 5 years on the development of innovations. The weakest effect came from instruments such as innovation promotion programs for big companies with government equity participation, ROSNANO's projects as well as projects implemented as part of the National Technological Initiative road maps (see Fig. 3). It was the NTI that was recognized as lagging behind original technological development plans for target markets. In particular, while three years ago Russia was competing in the AeroNet market with the United States in the development of remotely piloted vehicles, now Russia is visibly lagging behind its competitors1. The development is nevertheless moving forward - 8 NTI's road maps have been approved, with 450 projects worked out, including around 10 percent projects in progress2.
A slowdown in the development was a catalyst to the revision of approaches, resulting in three main lines of further NTI development. The first line is to establish infrastructural centers for each NTI market. The centers will be information and analytical entities specializing in indentifying new trends, holding conferences and online workshops as well as providing organizational support to startups. Therefore, companies operating in NTI markets will receive organizational and analytical and network interconnection support. The second line is to establish financial institutions designed to support startups, and the third line is to set up NTI competence centers (already in progress), where the NTI is to be aligned with the new 'Science' National Project: the creation of new NTI competence centers is an objective to accomplish as part of the National Project. The above policies are intended to contribute to the emergence of higher-quality projects for NTI cross-cutting technologies.
1 Edovina T. "Technological development requires new forms and formats of organization" // Kommersant, No. 55, December 03, 2018, P. 15. URL: https://www.kommersant.ru/doc/3814104
2 Butrin D. "We have managed to launch a series of technologically active sectors" // Kommersant, No. 55, December 03, 2018, P. 4. URL: https://www.kommersant.ru/gallery/3814084
ROSNANO 6%
NTI's draft road maps 6%
State-run companies' innovation promotion programs 5%
High-tech parks
6%
Loans from Industrial Development Fund (IDF) 8%
SMEs promotion infrastructure 10%
Innovation Promotion Fund programs 28%
Pilot innovation clusters 12%
Skolkovo 11%
Fig. 3. Public support polices that have contributed most to promoting technological innovations in recent 5 years
Source: National Report on Innovations in Russia 2017. Ministry of Economy, Open Government, Russian Venture Company (RVC), 2018. P.21.
The Russia Digital Economy national program, which underwent changes during the year, could be another incentive for technological development. There is a basis for enhancing the digital development - according to recent data, digital economy has contributed 5.6 percent to Russia's GDP, surpassing the proportion of agricultural industry1. In addition, a survey 2018 of Skolkovo Business School revealed that managers in charge of digital transformation at some key state-run corporations have different views on how it should be implemented in their companies. This implies a wide range of new solutions rather than a lack of clarity over the matter of discussion. An important aspect of digital technologies development programs is the idea of relying upon companies. To date, 12 companies that are prepared to draft road maps for technological development have been identified, most of which are ready to be involved in the development of 2-3 technologies2. The front-runners are Rostech with plans to develop road maps for 7 digital technologies and MTS with road maps for 5 technologies. Companies that are involved in the development of road maps will have an opportunity to take the lead in technologies they select. This approach reminds of the principles of developing NTI road maps that have provisions for leadership and for responsibility of parent corporate developers for outputs. Although the approach has not
1 Korovkin V. Russia facing the risk of missing "digital" opportunity for economic growth // ZNAK, December 05, 2018. URL: https://www.znak.com/2018-12-05/rossiya_riskuet_upustit_cifrovoy_ shans_na_ekonomicheskiy_rost
2 E. Balenko, A. Balashova, E. Litova. Companies to qualify for developing Digital Economy technologies // RBC, February 05, 2019. URL: https://www.rbc.ru/technology_and_media/05/02/2019/ 5c5820119a794707cf8ada4a?fbclid=IwAR2C0J5gpkxteRgCwFJhm8AW960oo29N-zPcnUQ4103SK 9zfUHdxX4W1XlU
yet delivered unambiguously positive outputs, the Russia Digital Economy Program provides for the possibility to harness the NTI experience.
Despite a few advancements made so far, they are insufficient to change the overall technological innovations development landscape, and public support policies are yet to become more efficient. There are few reasons for that. The first reason is that federal funding of research and development is dominant even in the business sector, which somehow weakens business initiatives while supporting the practice of "state-funded innovation." The second reason is that innovations within the country have minor influence on the ability to compete. Access to administrative resources, particularly for big companies, remains the key aspect. The third reason lies in the fact that the level of innovation activities is determined by far not only the presence of policies designed to stimulate innovations. Basic economic factors (for example, terms of bank loans) are just as much important, but they at best do not interfere with the development of innovative processes.
* * *
Science in Russia is facing long-lasting problems of quantitative and qualitative parameters of the scientific potential and the structure of funding. The proportion of public funding remains high as never before, no serious incentives have been offered to encourage the business sector to invest in research and development, the promotion of technological innovations has not yet delivered scalable outputs. Sanctions have so far failed to have an effect in terms of promoting own advanced export-led technologies.
There is a positive shift in basic and exploratory research, publication activities are on the rise in institutions of higher education and in the public sector. It is important that leading institutions of higher education have started harnessing the incentives to raise the number and the quality of publications. Activities aimed at promoting Russian journals in international databases, namely Web of Science and Scopus, also contribute to the profile of Russian science.
As envisioned by the Russian government, the rationale and quality of scientific research should be raised due to new functions of the Academy which will be in charge of scientific and methodological management of all the organizations across the country that perform state-funded research and development. The solution, however, has some problematic aspects, namely the Academy's human resources are insufficient to meet the required volumes of expertise, the Academy's mandate to make decisions without having to bear responsibility for them, as well as increase in the already heavy bureaucratic burden on research-performing organizations and institutions of higher education.
Science is regarded as inherent value, according to new public scientific development plans, which is a positive, to a certain extent, factor, indicating that the state recognizes this area as an important area. There are plans to raise state budget funding of basic science and to enhance human resource potential. However, some of the new policies ignore the existence of (HR, financial, organizational) misalignments in science. The new projects continue to show the gap between scientific development targets and economic needs of the country, and there is a prevalent focus on various ratings.
6.4. The model of modern entrepreneurial university: has it been created in Russia?1
The competitive edge of national economic systems is largely determined by the activities of higher education institutions. In the modern world, universities carry out not only educational functions, but also generate actively new knowledge and innovations. Both in industrially developed economies and developing countries, universities are often the sources of new technologies for business, and there is numerous evidence of the consolidation of this role of the university sector2.
Being a key component of the Triple Helix Model - a model of the industry-government-university relation, which has won a broad recognition of late - universities play an important role in innovation processes taking place in the knowledge-based economies3. The main point of the Triple Helix theory consists in the fact that the institutes responsible for development of new knowledge and formally established in different countries as universities have a dominating position in the innovation development system4. As compared to representatives of other sectors of science -research institutes and corporate labs - the universities' undeniable advantage is the permanent natural inflow of new personnel, that is, students who can act not only as assistants in handling of various issues, but also bring new non-trivial ideas into research and innovation activities because their perception of what is above and beyond the limits of science is limited to a lesser extent than with other researchers5.
In the past 15-20 years, lots of universities have undergone substantial changes and become more independent entities with a more active position in their relations with the state and the business, as well as their search for new ways of development6. This pattern
1 This section was written by Kuzyk M., the NRU HSE; Radygin A., the Gaidar Institute, the RANEPA; Simachev Yu., the NRU HSE, the RANEPA.
2 Henderson R., Jaffe A., Trajtenberg M. (1998) Universities as a source of commercial technology: A detailed analysis of university patenting. // Review of Economic and Statistics 80(1), pp. 119-127.; Caloghirou Y., Kastelli I., Tsakanikas A. (2004) Internal capabilities and external knowledge sources: complements or substitutes for innovative performance? // Technovation 24 (1), pp. 29-39. ; Amara, N., Landry, R. (2005). Sources of Information as Determinants of Novelty of Innovation in Manufacturing Firms: Evidence from the 1999 Statistics Canada Innovation Survey. Technovation 25, pp. 245-259.; Tether B. S., Tajar A. (2008) Beyond industry-university links: Sourcing knowledge for innovation from consultants, private research organizations and the public science-base. Research Policy, 37 (6/7), pp.1079-1095.
3 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337; Etzkowitz H., Leydesdorff L. (2000) The Dynamic of Innovations: from National System and «Mode 2» to a Triple Helix of University-Industry-Government Relations. // Research Policy, 29, pp. 109-129.
4 Dezhina I., Kiseleva V. (2007) "The Triple Helix" in Russia's Innovation System // Voprosy Ekonomiki, No. 12.
5 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
6 See, for example, Klyachko T.L., Mau V.A. Future Universities. Moscow, The Delo Publishers, 2015.
or "the new generation" of universities which not only generate and spread the knowledge, but also solve the goal of applying that knowledge for the benefit of the economy and the general public are called entrepreneurial universities1.
This section deals with the analysis of the issues related to the introduction in Russia of the model of an entrepreneurial university in terms of the relevant international experience and the government's strategic position as regards consolidation of universities' role in R&D and promotion of innovations. The main attention is paid to universities' R&D and innovation activities because, on one side, these components (particularly, the latter) determine the "new quality" of modern entrepreneurial universities, while, on the other side, research activities and innovation activities were not traditionally incidental to the Soviet and Russian higher education system as in case of the former they were carried out by the academic science institutions, while in case of the latter, by the industry in close integration with the sectoral science. Within the frameworks of the research, the empirical analysis's information base includes the official statistics materials, the state authorities' open source data, the outputs of surveys of universities and companies, as well as in-depth interviews.
6.4.1. An entrepreneurial university: essential characteristics and modern aspects
As a starting point for the analysis of the existing perception of the evolution of universities and their role in the economy and the community, widely-recognized publications by Henry Etzkowitz2, Burton Clark3 and Johan Vissema4 were used.
Analyzing the "classical" approach of David Riesman and Christopher Jencks5, who dealt with the processes of development of the US higher education system and coined the term "academic revolution" for defining the extent of the changes which occurred in the middle of the 20th century, Henry Etzkowitz speaks about two "academic revolutions" as applied to the beginning of the 21st century. The first one started in the 19th century and still in action has managed not only to elevate research to the ranks of "the academic mission", but also led to establishment of research universities known
1 Clark B. (1998) Creating Entrepreneurial Universities: Organizational Pathways of Transformation. Oxford: Pergamon Press; Clark B. (2001) The Entrepreneurial University: New Foundations for Collegiality, Autonomy, and Achievement // Higher Education Management, 13 (2), pp. 9-24; Etzkowitz H., Webster A., Gebhardt C., Cantisano Terra B.R. (2000) The Future of the University and the University of the Future: Evolution of Ivory Tower to Entrepreneurial Paradigm. // Research Policy, 29(2), pp. 313-330.
2 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
3 Clark B. (1998) Creating Entrepreneurial Universities: Organizational Pathways of Transformation. Oxford: Pergamon Press.Clark B. (2001) The Entrepreneurial University: New Foundations for Collegiality, Autonomy, and Achievement // Higher Education Management, 13 (2), pp. 9-24.
4 Vissema J. (2016) The Third Generation University: University Steering in the Transition Period. [Translated from English]. - Moscow. The Olimp-Business Publishers.
5 Jencks C., Riesman D. (1968) The Academic Revolution. Garden City, N. Y.: Doubleday and Co.
often as humboldtian universities1. Such universities' specifics consist in the effective combination of education and research activities, so they represent a kind of integrated research and educational centers2. It is to be noted that the importance of research activities was postulated by universities themselves, while implementation of such activities actually became the professorship's main objective3. In addition, in the mid-20th century some prominent researchers believed that universities were the "pure science" entities at the source of scientific progress4.
An important result of the current second academic revolution is the emergence of the formation of the so-called entrepreneurial universities which assume the tasks of not only training of human resources and generation, preservation and transfer of knowledge, but also large-scale establishment of innovation firms and development and introduction of new technologies and, eventually, economic development5.
An entrepreneurial university's key specifics which makes it different from a traditional research university consists in the fact that the former along with solution of purely research objectives takes the responsibility for practical application of the received outputs of the research. In other words, in addition to educational and research activities, the university carries out "the third mission" (also called the third role, the third objective and so forth) which focuses on facilitation of practical application by the business or the community of the outputs of research6. It is to be noted that for the long-term and sustainable development the entrepreneurial university has to ensure the balance between all the three missions to avoid domination of any of them to the detriment of the others7.
Speaking about the new generation of universities, Johan Vissema singles out as their main specifics the facilitation of utilization of the created knowledge (that is, the third
1 It comes from the family name of Wilhelm von Humboldt, renowned German scientist. political figure, philolog, linguist and the Minister of Education in the Post-Napoleon Prussia who initiated in 1809 the establishment of the Berlin University which soon became the leading university of Prussia/Germany (Vissema J. (2016) The Third Generation University: University Steering in the Transition Period. [Translated from English]. - Moscow: The Olimp-Business Publishers).
2 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
3 Guba К. (2012) Is the Academic World Just. Polit.ru URL: http://www.polit.ru/article/2012/06/ 24/publish_or_perish/
4 Shibany A., Reiner C. (2014) Can Basic Research Prevent Economic Stagnation? // Foresight-Russia, 8 (4), pp. 54-63.
5 Etzkowitz H., Webster A., Gebhardt C., Cantisano Terra B.R. (2000) The Future of the University and the University of the Future: Evolution of Ivory Tower to Entrepreneurial Paradigm. // Research Policy, 29(2), pp. 313-330; Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
6 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337; Williams G., Kitaev I. (2005) Overview of National Policy Contexts for Entrepreneurialism in Higher Education Institutions // Higher Education Management and Policy, 17 (3), pp. 125-141.
7 Konstantinov G., Filonovich С. (2007) What is the Entrepreneurial University // The Voprosy Obrazovania, Issue No.1, pp. 49-62.
mission) primarily for the benefit of the university itself - the latter is viewed as "the cradle of new entrepreneurial activities"1. However, along with the above specifics, Johan Vissema presents six other important parameters of the new generation of universities:
• Active participation in competition both in the educational field (for best professors and students) and in the research field (for relevant contracts with companies);
• Active partnership and networking with companies, research institutions, other universities and investors, including through multiple external and internal infrastructure facilities. According to Johan Vissema, the existence of the effective international cooperation network is the determinant characteristic of the world's leading modern universities that makes them different from viable, but less advanced and prestigious universities of local importance;
• The multidisciplinary nature of activities, availability of relevant units (institutes) and research teams;
• The combination of mass and elite academic and research programs: implementation of standard higher education training programs and creation of special conditions for the most talented students and professors, carrying out of break-through and "incremental" research and other;
• Cosmopolitanism and multiculturalism with English used as the main language in all the spheres of activities;
• A high extent of universities' independence from the government, primarily, financial independence which can be facilitated, along with attraction of orders from the business and rendering of paid services, by university special purpose capital funds which are normally formed by university graduates.
It is noteworthy that by remaining independent as much as possible both from the government and the business, the entrepreneurial university should be at the same time in a close contact with both of them. Ideally, the definition of new research objectives often of multidisciplinary nature should stem from this networking. However, the transfer of knowledge between universities, state research institutions and companies should be carried out in "the two-lane street" regime2.
An important component of a university's success consists in the activities of research groups and think-tanks which represent de facto its scientific core. At the entrepreneurial university, such groups should have characteristics common to a successful innovation company: an entrepreneurial initiative, constant search for external sources of funding, distribution of the information on their break-throughs and other, that is, everything
1 Vissema J. (2016) The Third Generation University: University Steering in the Transition Period. [Translated from English ]. - Moscow: The Olimp-Business Publishers.
2 Clark B. (2001) The Entrepreneurial University: New Foundations for Collegiality, Autonomy, and Achievement // Higher Education Management, 13 (2), pp. 9-24; Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
which is needed to reduce cultural differences and promote networking between the university science and the business1.
The presented concept of the entrepreneurial university has the whole number of characteristics and parameters which make it different from research universities of the former generation (Table 26). In its turn, the complexity of transformation of universities into a new entrepreneurial model is justified by this situation. Burton Clark, architect of the concept of the entrepreneurial university singles out the three important conditions2:
(1) Strengthening of the steering core. In different countries and universities, the steering core may be different, but in any case it should include both the university's central steering bodies and academic units and be guided in its activities simultaneously both by managerial and academic principles and values. Development of the steering core makes it possible for universities to become more active and flexible, as well as be more oriented to the requirements of demand. It is to be noted that for the entrepreneurial university it is as much important as for traditional research universities to maintain the team-spirit and joint leadership both within the frameworks of research groups and department and at the level of the university as a whole, in particular3;
(2) Expansion of the university's developmental periphery which includes infrastructure facilities in the field of transfer of technologies, intellectual property management, attraction of external sources of funding and even networking with graduates, as well as the university's multidisciplinary research centers. As compared to traditional academic departments, it is easier for such units to go beyond the limits of the university, communicate with outside agencies and research groups and act as intermediaries in networking between university departments and the outside world;
(3) Diversification of financing. Transformation of the university and its functioning in the new capacity requires additional resources. Apart from the baseline state funding which often happens to be reduced, the entrepreneurial university has to make efforts to attract state financing on a tender basis. In addition, the sources of additional funding may come from firms, regional authorities, charity organizations, graduates, students, intellectual properties and other. Such sources ensure not only financial diversification, but also the university's actual institutional independence at least in terms of Gomer Babbidge and Robert Rozenweig who defined it as "a lack of dependence from the narrow base of the sources of support"4;
1 Slaughter S., Leslie L. (1997) Academic Capitalism: Politics, Policies, and the Entrepreneurial University. Baltimore: Johns Hopkins University Press; Subotzky G. (1999) Alternatives to the Entrepreneurial University: New Modes of Knowledge Production in Community Service Programs. // Higher Education, 8 (4), pp. 401-440.
2 Clark B. (1998) Creating Entrepreneurial Universities: Organizational Pathways of Transformation. Oxford: Pergamon Press.
3 Clark B. (2001). The Entrepreneurial University: New Foundations for Collegiality, Autonomy, and Achievement // Higher Education Management, 13 (2), pp. 9-24.
4 Babbidge H., Rosenzweig R. (1962). The Federal Interest in Higher Education. New York: McGraw-Hill.
(4) Support on the part of the university's academic heartland, that is, its traditional departments which account for a larger volume of work. Success or failure of the transformation of the university depends in principle on whether the university's departments accept or oppose the undergoing changes. It is noteworthy that substantial changes are required from academic departments themselves; they should carry out actively entrepreneurial activities, including a search for external partners and additional sources of funding and combine the traditional academic values with new managerial views and approaches;
(5) Introduction of the entrepreneurial culture which first as an idea based on acceptance of changes and then as a system of views and opinions should spread all over the university, including its academic heartland, be integrated into practical activities and become an important component of the university's identity and reputation.
Table 26
Comparison of the model of the research and academic university
Research university Entrepreneurial university
1 2 3
Key objectives ("missions") • educational - training of personnel • R&D - development of knowledge and technologies • educational - training of personnel • R&D - development of knowledge and technologies • innovation - facilitation of utilization by economy and community of created knowledge and technologies
Main function in social and economic system Development of intellectual and human capital Facilitation of sustainable social and economic development
Nature of research Generally, monodisciplinary Monodisciplinary and multidisciplinary
Personnel training • experts • researchers • experts • researchers • entrepreneurs
Model of networking with business line - supplier of personnel and knowledge Network- online (occasionally- advanced) response to queries
Model of networking with state Subordinate with high level of autonomy in business activities Partnership with almost total independence
Government involvement Moderate - determination of strategic agenda and financing low - creation of conditions and participation in development of long-term vision
Identification of prospective lines of development Independently, but with taking into account objectives formed by state Independently in dialogue with state and business
Networking with external environment limited, toughly regulated by formal and informal rules with small number of "enter-exit" points Independent and active, carried out at all levels
Internal pattern Rather rigid based on officially identified units -departments, institutes and other Flexible based on combination of formal and informal units - creative teams and other.
"Role model" of internal departments Elite research laboratory with strict research focus and rigid hierarchy Innovation company which is in constant development and search for perspective lines of activities and partners
Cooperation with other departments It often happens in those lines where there is lack of own competence; often harmonizes with competition in other lines Inherent to units by virtue of their openness to cooperation and inflow of new knowledge, competences and ideas
Internal culture Mainly intellectual and elite Mainly entrepreneurial
Internal steering system centralized Decentralized one with emphasis on official and informal units
Optimal leader Mainly distinguished scientist and official capable of networking with state authorities Mainly innovator and entrepreneur capable of networking effectively with business, state authorities and professorship
Financial base Mainly state funding Diversified one where state is only one of sources
Infrastructure Generally, internal External and internal with emphasis on external
Cont'd
1 2 3
Geography of activities Regional, national and rarely international level global
Indicators of success • graduates' employment and professional growth • academic recognition • self-actualization of graduates • recognition in science and social and business environment • development of sustainable flow of innovation businesses • large-scale commercialization of created technologies • contribution to upgrading of indicators of social and economic development
Source: own compilation based on Clark, 1998; Etzkowitz et al., 2000; Etzkowitz, 2003; Vissema, 2016).
With evident difficulties related to compliance with transformation conditions formulated by Burton Clark, it is important to point out that a large number of universities have already succeeded in advancing much along this pathway. In his classic paper1, Burton Clark singles out five such examples in Western Europe: the University of Warwick2 and the University of Strathclyde in the UK, the University of Twente in the Netherlands, the Chalmers University of Technology in Sweden and the University of Joensuu in Finland3. Henry Etzkowitz4 supplements the list of universities' successful transformation into the entrepreneurial phase with the Massachusetts Institute of Technology. Finally, Johan Vissema5 provides the examples of universities which are passing through the "entrepreneurial" transformation - the Bandung Institute of Technology in Indonesia and the "Angel Kanchev" University of Ruse in Bulgaria - and those which successfully completed such a transformation late in the 20th century - early in the 21st century (the University of Cambridge). Analyzing the "Cambridge phenomenon", Johan Vissema identifies the three major components of its success6:
• formation of the university's "innovation belt": infrastructure facilities, such as a technology park, science part, entrepreneurial center, center for transfer of technologies, direct investment fund and other established partly by the university and its graduated and partly on the initiative and at the expense of the government;
• establishment of a large number of high-tech firms mainly owing to effectively functioning infrastructure so that they later managed to form themselves a favorable environment for innovation entrepreneurship;
1 Clark B. (1998) Creating Entrepreneurial Universities: Organizational Pathways of Transformation. Oxford: Pergamon Press.
2 Hereinafter, the English names of universities are given.
3 At present, it is an integral part of the University of Eastern Finland.
4 Etzkowitz H. (2003) Innovation in innovation: The Triple Helix of university-industry-government relation. // Social Science Information, 42 (3), pp. 293-337.
5 Vissema J. (2016) The Third Generation University: University Steering in the Transition Period. [Translated from English]. - Moscow: the Olimp-Business Publishers.
6 Ibid.
• adoption by the university's leadership of the policy of promotion of cooperation
with the business.
So, the actively debated model of the entrepreneurial university is by no means detached from the reality and there are numerous instances of implementation thereof, though not always in absolute terms. In addition, according to Burton Clark, the very concept of the entrepreneurial university is a kind of "umbrella" over the collection of ideas about the modern progressive and independent university which is in search of new fields of knowledge and opportunities of development thereof. In networking with the government and the business, such a university is not a trailing side, but a partner and intermediary; also it is noteworthy that universities are capable of forming new "coalitions of knowledge" with participation of other parties1.
6.4.2. Development of the university sector in different countries: models and the specifics
At present, universities are one of the major actors of the global innovation system, however, their role in generation of new knowledge and facilitation of practical utilization thereof greatly vary at the level of individual countries. In the US, Japan, Korea, Western Europe and Latin America, R&D is an important and integral part of the university's activities (though most of the above countries have a large sector of state-financed specialized research institutes). At the same time, if in the US, Germany and Italy the university research is normally carried out by units and the personnel engaged in the academic process, in other countries, such as the UK, Sweden, Norway and the Netherlands the research work is often de facto separated from the educational process, at least at the personalia level2.
The high importance of the university science as a whole in a country is often accompanied by uneven distribution of research activities across universities. It is particularly typical of Latin American countries where research activities are mainly concentrated in a small number of elite (generally, state-run) universities, though in some countries, such as Brazil and Mexico, research institutes play an important role, too.
Another model of the university science has been formed in most former Soviet republics and socialist camp countries, as well as India and other countries which earlier gravitated to the Soviet bloc where research activities at universities were deemed as secondary because they were carried out by specialized research institutes and laboratories. However, individual post-communist countries, such as Estonia and Hungary have succeeded greatly in development of the university science sector3.
1 Clark B. (2001) The Entrepreneurial University: New Foundations for Collegiality, Autonomy, and Achievement // Higher Education Management, 13 (2), pp. 9-24.
2 Altbach P., Reisberg L., Rumbley L. (2009) Trends in Global Higher Education: Tracking an Academic Revolution. Paris: UNESCO.
3 Glänzel W., Schlemmer B. (2007) National research profiles in a changing Europe (1983-2003). an exploratory study of sectoral characteristics in the Triple Helix. // Scientometrics, 70 (2), pp. 267-275;
In China, the well-developed university science coexists with the vast sector of state research institutes; it is noteworthy that the latter account for the larger volume of R&D, while universities yield the prevailing volume of scientific publications1. In the higher education sector, research activities are concentrated in a small number (by China's standards) of state-funded elite national universities which are set the goal to build up China's innovation potential and secure leading positions in research areas which are important to the country's economic development and national security. In China, 112 universities - participants in the "211 Project"2 (that is 6 percent of the total number of China's higher education establishments) - account for nearly 70 percent of the higher education sector's R&D, while most Chinese universities are oriented exclusively to academic activities3.
The US is conventionally regarded as a particularly successful (if not model) country example of organization of universities' research and innovation activities. US universities play an important role in R&D: the university science accounts for a larger portion of fundamental research carried out in the US. Universities' research activities are closely linked with educational activities: leading researchers actively engage in the academic process and utilize the advanced scientific achievements and research outputs in it. It is to be noted that the quality of US university research meets the international standards, while in most areas it sets the standard de facto owing to high professionalism of the higher education teaching personnel and leading scientists attracted from abroad, as well as availability of the advanced material and technical base for R&D, including state-of-the-art research equipment4.
Along with high research activities, universities pay much attention to commercialization of R&D outputs as they normally have for this purpose the required infrastructure: patent offices, centers for transfer of technologies, engineering centers
Altbach P., Reisberg L., Rumbley L. (2009) Trends in Global Higher Education: Tracking an Academic Revolution. Paris: UNESCO.
1 Zhou P., Leydesdorff L. (2006) The emergence of China as a leading nation in science. // Research Policy, 35 (1), pp. 83-104.
2 The project of China's Ministry of Education, which has been carried out since 1995. The project envisages state support for China's nearly 100 leading universities to ensure their competitive edge both at the national and international level in research and educational training in accordance with the challenges of the 21st century. The name of the project is derived from the combination of the figures "21" and "100" (for more details, see, for example, Zhao, Zhu, 2010; Cai, 2013).
3 Zha Q. (2009) Diversification or homogenization: how governments and markets have combined to (re)shape Chinese higher education in its recent massification process. // Higher Education, 58 (1), pp. 41-58; Zhao L., Zhu J. (2010) China's higher education reform: What has not been changed? // East Asian Policy, 2 (4), pp. 115-125; Cai, Y. (2013) Chinese higher education: The changes in the past two decades and reform tendencies up to 2020. // In: L.d.C. Ferreira & J.A.G. Albuquerque (Eds.), China and Brazil: Challenges and Opportunities. Campinas: Anablumme, pp. 91-118.
4 Maidanchik B. (2007) The Specifics of the US Higher Education System (University Science). // Izvestia UrGEU. Issue No.2, pp. 86-96; Altbach P., Reisberg L., Rumbley L. (2009) Trends in Global Higher Education: Tracking an Academic Revolution. Paris: UNESCO.
and other. In addition, in the US the university science constitutes traditionally a base for establishing a large number of new firms1.
Fig. 4. University science in different countries, qualitative evaluation
Source: own compilation based on Zhou, Leydesdorff, 2006; Maidanchik, 2007; Glanzel, Schlemmer, 2007; Bernasconi, 2008; Altbach et al., 2009; Zha, 2009; Zhao, Zhu, 2010; Cai, 2013).
Undoubtedly, the successful development of the US university science would be infeasible without a sound and diversified financial base. Traditionally, the US federal government pays nearly a half of universities' expenditures on R&D (55 percent in 2015 and 61 percent three years earlier) and another 6 percent is paid by the government of the state and local authorities2. A large portion of government funding to universities is provided on a tender basis, while the main sources thereof are the Department of Health
1 Altbach P., Reisberg L., Rumbley L. (2009) Trends in Global Higher Education: Tracking an Academic Revolution. Paris: UNESCO; Pankova V. (2016) Military Technologies, Innovations and Security. Moscow: IMEMO RAS.
2 According to the data of the National Science Foundation, National Center for Science and Engineering Statistics. Higher Education Research and Development Survey. Higher education R&D expenditures, by source of funds: FYs 2010-2015. URL: https://ncsesdata.nsf.gov/herd/2015/html/ HERD2015_ DST 02.html
Protection and Human Services, the Defense Department and the National Science Foundation (NSF) which jointly account for about 80 percent of the expenditures on the university science1. It is to be noted that there is a whole range of specialized programs aimed at underpinning universities' R&D and research infrastructure, such as the Defense University Research Instrumentation Program (DURIP) and Multidisciplinary University Research Initiatives Program (MURI) sponsored by the US Defense Department and the Established Program to Stimulate Competitive Research (EPSCoR) of the NSF2. Apart from the government funding, universities actively attract funding from the business, nongovernment funds and organizations, as well as private donors, primarily, their graduates. Thanks to the established practice of patenting the prospective outputs of R&D, license royalties are an important source of universities' revenues3.
It is to be remembered that the "quality" standard of US universities varies considerably. The above relates primarily to a dozen of elite universities which have succeeded in all the three components of the "academic mission": education, research and innovation4. However, the specifics of the US university sector consists in the fact that unlike other countries where universities are active participants in research activities (China, Korea, Brazil or Chile), in the United States R&D is not limited nation-wide to a small number of "elite" universities.
Interestingly, neither the US, nor other countries (the UK, Switzerland, Sweden, Japan, Korea or Israel) where the role of the higher education sector in R&D is generally believed to be of a paramount importance are attributed to the leaders as regards the share of the university in the overall volume of internal expenditures on R&D. The high index value is primarily typical of former Soviet republics: Georgia, Lithuania, Latvia and Estonia; other small European countries, such as Cyprus, Portugal, Slovakia, Greece and Malta and some new industrial countries, such as Turkey, Chile and Indonesia (Fig. 5). The distribution of countries by the unit weight of researchers representing the higher education sector is almost similar, but the leaders as regards this index include other former Soviet republics (Uzbekistan and Kirgizia) and new industrial countries (Malaysia, Iran and South Africa).
1 According to the data of the National Science Foundation, National Center for Science and Engineering Statistics. Higher Education Research and Development Survey. Federally financed higher education R&D expenditures, by federal agency and R&D field: FY 2015. URL: https://ncsesdata. nsf.gov/ herd/2015/html/HERD2015_DST_09.html
2 In addition, similar programs of support are currently carried out by other four federal agencies - for more details, see (Harris, 2017).
3 Maidanchik B. (2007) The Specifics of the US Higher Education System (University Science). // Izvestia UrGEU. Issue No.2, pp. 86-96; Gusev A. (2013) University Science in Russia: Transfer of the Western Model and Possible Risks. // Obschestvo i Ekonomika, Issue No. 9, pp. 141-164.
4 It is to be noted that leading US universities along with some European leading universities were used as a base for the above-mentioned "ideal model" of a modern entrepreneurial university.
100%
Share of higher university sector in internal costs on R&D
Fig. 5. The unit weight of the higher education sector in internal expenditures on R&D in 2016 (or the nearest year on which the data are available)
Source: NRU HSE, 2018.
The global ratings of the leading universities1 - the most prominent ones are the QS (QS World University Rankings), the Times Higher Education (THE World University Rankings) and the Academic Ranking of World Universities (ARWU) - permit to get a general idea of the level of development of the university sector in different countries. All the above ratings, as well as the newly established the "Three Missions of University" Moscow International Rating of Higher Education Institutions make an emphasis on the quality and efficiency of universities' research and educational activities, but the methods of formation of the ratings and the scope of facts used in indicators vary considerably (Table 27).
As a result, different universities are at the top of the three major global ratings: the Massachusetts Institute of Technology has been the irreplaceable leader of the QS rating since 2012, the University of Oxford has been the leader of the THE rating in the past three years, while the Harvard University has led the ARWU rating for 16 years (the Harvard University is the leader of Russia's "Three Missions of University" rating, too). At the same time, if one examines the rankings of different countries which are usually determined by the top three universities2, the differences between ratings as regards leader countries are the minimum: the US and the UK are at the top of all the ratings followed by in different order by Canada, Switzerland, Germany, China and Australia. Also, Hong Kong and Japan are among the leaders in two out of the three ratings. The
1 Definitely, one is aware of substantial limitations of such an approach related to the inevitable conditionality of any methods of the rating process and the bias of obtained outputs. For this reason, one proceeds along the way of simultaneous examination of the outputs of different ratings to neutralize partially the bias.
2 See, for example, Global Innovation Index 2018, URL: https://www.globalinnovationindex.org/gii-2018-report.
countries with a higher share of universities in internal R&D expenditures are neither represented in the global ratings at all, nor stand far from the leaders (Fig. 6).
Table 27
The key aspects of compiling global ratings of leading universities
QS World University Rankings THE World University Rankings Academic Ranking of World Universities Three Missions of University
Utilized data
Outputs of own surveys and open source data Outputs of own surveys and open source data Open source data only Open source data only
Components (indicators) and weight
40% - academic reputation of university
determined by means of survey of over 80,000 representatives of higher education sector as regards quality of universities' academic and research activities; 20% - ratio between academic staff and students; 20% - citation related to number of academic staff in Scopus, normalized by subject area; 10% - reputation of university with employers based on outputs of survey of 40,000 respondents as regards quality (competence, innovation and efficiency) of graduates; 5% — share of foreign academic staff;
5% — share of foreign students.
30 percent — training (educational environment):
15 percent - prestige value of university as regards training determined on basis of outputs of survey (over 20,000 respondents);
6 percent - ratio between number of postgraduates who defended their thesis and academic personnel; 4.5 percent - ratio between number of academic personnel and students; 2.25 percent - ratio between number of postgraduates and bachelor's degree students;
2.25 percent - revenues to number of academic staff;
30 percent — research (volume, revenues and reputation):
18 percent - university's research reputation determined on basis of outputs of survey;
6 percent - revenues from research to number of academic staff; 6 percent - research efficiency -number of publications indexed by Scopus, normalized by size of organizations and subject areas;
30 percent — citation rate (effect of research): average number of citations accounted for by Scopus, normalized by subject areas;
7.5 percent — internationally (personnel, students and research):
2.5 percent - share of foreign students; 2.5 percent - share of foreign employees;
2.5 percent - international cooperation: share of publications with foreign coauthors normalized by subject areas; 2.5 percent — revenues received from business (transfer of knowledge) to number of academic staff.
40 percent — number of academic staff:
20 percent - number of employees who became Nobel Prize winners or were awarded Fields Medal; 20 percent - number of employees included in list of highly quoted researchers of Web of Science;
40 percent — research outputs:
20 percent - number of papers published by Nature and Science in past five years (except for universities of social and
humanitarian profile); 20 percent - number of publications accounted for in Science Citation Index-Expanded and Social Science Citation Index Web of Science;
10 percent — quality of training: number of graduates (including postgraduates), who became Nobel Prize winners or were awarded Fields Medal; 10 percent - academic efficiency: total of weighted values of main indicators to number of academic personnel.
45 percent — "Education":
15 percent - ratio of university's budget to number of students;
15 percent - ratio of number of students to number of academic staff;
8 percent - share of foreign students in total number of students;
7 percent - number of wins at International Student Olympiads; 25 percent — University and Community":
9 percent - number of university graduates whom individual page is dedicated in Wikipedia;
6 percent - number of university's online courses placed on global online platforms;
4 percent - share of university in overall volume of publications of universities nationwide;
3 percent - total number of pages of university's Web-site indexed by leading search systems;
3 percent - size of Internet audience of university's Web-site; 3 percent - number of university's account subscribers in social networks;
1 percent - number of browsings of university's Web-page in Wikipedia; 20 percent — "Science":
6 percent - number of scientific prizes of university's academic staff and graduates from IREG list;
5 percent - ratio of revenues from research to number of academic staff;
5 percent - average normalized citation (global level) in Scopus; 5 percent - average normalized citation (global level) in Web of Science;
2 percent - normalized browsings of scientific publications (according to Scopus);
1 percent - average normalized citation (nationwide level) in Scopus; 1 percent - average normalized citation (nationwide level) in Web of Science._
Source: QS World University Rankings Methodology, URL: https://www.topuniversities.com/qs-world-university-rankings/methodology; World University Rankings 2019: methodology, URL: https://www.timeshighereducation.com/world-university-rankings/methodology-world-university-rankings-2019; ARWU2018 Methodology, URL: http://www.shanghairanking.com/ARWU-Methodology-2018.html; Methodology of the "Three Missions of University"Moscow International Rating of Universities, URL: https://mosiur.org/files/methodology_17/BUL_Metod_Tri_missii_ RU.pdf
100 90 80 70 60 50 40 30 20 10
THE2019
QS2019
ARWU2018
Three Mission of University 2018
0
Fig. 6. The average values of the ratings of the country's top three universities in global ratings of universities
Source: own calculations based on the data of the QS World University Rankings 2019, URL: https://www.topuniversities.com/university-rankings/world-university-rankings/2019; THE World University Rankings 2019, URL: https://www.timeshighereducation.com/world-university-rankings/ 2019/world-ranking#!/page/0/length/25/sort_by/rank/sort_order/asc/cols/stats; Academic Ranking of World Universities 2018, URL: http://www.shanghairanking.com/ARWU2018.html; the "Three Missions of University" Moscow International Rating of Universities, URL: https://mosiur. org/ranking2018/.
It is noteworthy that all the above ratings either completely ignore or pay little attention to the third mission of universities, that is, innovation, by measuring the efficiency and creativity of research activities almost exclusively the number of publications and the rate of citation (Table 27). The only exception is the indicator of a university's revenues received from business; this indicator is accounted for by the THE rating with small weight. To remove that gap, let us consider a sub-index of the Global Competitiveness Index reflecting the extent of networking of universities with the business in R&D (Fig. 7). For over a decade, the leaders as regards this index are Switzerland, the US, Finland and Germany with Israel, the Netherlands and the UK joining them recently.
Fig. 7. The extent of the networking of universities with the business in R&D
Note: evaluation on the seven-grade scale (1 - no networking /minimum networking; 7 - broad/intense networking) based on the outputs of the survey of companies' CEOs: in 2018 - 12,300 respondents from 140 countries, in 2012 - 14,100 respondents from 140 countries and in 2006 - 11,200 respondents from 125 countries.
Source: The World Economic Forum. The Global Competitiveness Report 2017-2018. University-industry collaboration in R&D. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=EOSQ072; The Global Competitiveness Report 2012 - 2013. Innovation. URL: http://reports.weforum.org/global-competitiveness-report-2012-2013/#=§ion= data-tables-gcr_pillar12_2012-13; The Global Competitiveness Report 2006-2007. URL: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2006-07.pdf.
To get a comprehensive idea of the extent to which the model of an entrepreneurial university is incidental to one or another country (at least at the level of the leading representatives of the university sector), it is necessary to consider the extent of implementation by the university sector of all the three missions to single out this formation of higher education institutions. The two missions - education and research -are fairly completely reflected in global university ratings of which the QS rating and the THE rating will be used because the ARWU rating is heavily "biased" towards the academic science, while the efficiency of implementation of the innovation mission is estimated on the basis of the abovementioned index of networking between universities and the business. This will permit to divide the aggregate of the countries on which all the required data are available into the two groups by the extent of proximity of the leading national universities to the model of an entrepreneurial university (Fig. 8). The group of leaders included the leading industrialized countries, as well as "Asian tigers" and some new industrialized countries. The group of the outsiders included individual countries of Southern Europe, a number of new industrialized countries mainly of the
"second" and the "third waves", as well as former socialist camp states and Soviet republics.
Note: The vertical axis shows the average ranking of the top three universities of a country in the QS World University Rankings 2019 and/or the THE World University Rankings 2019; The horizontal axis shows the value of the index of networking of national universities with the business (Global Competitiveness Index 2017-2018);
The area of the circles is proportional to the share of the university sector in the internal expenditures on R&D in 2016. (or the nearest year on which the data are available).
Fig. 8. The development of the university sector of different countries in terms of the model of an entrepreneurial university
Source: own compilations based on the data of the QS World University Rankings 2019, URL: https://www.topuniversities.com/university-rankings/world-university-rankings/2019; THE World University Rankings 2019, URL: https://www.timeshighereducation.com/world-university-rankings/2019/world-ranking#!/page/0/length/25/sort_by/rank/sort_order/asc/cols/stats; World Economic Forum. The Global Competitiveness Report 2017-2018. University-industry collaboration in R&D. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/ #series = E0SQ072; Indicators of Science: 2018: Statistical Bulletin. Moscow: NRU HSE, 2018.
Interestingly, BRIC countries are evenly distributed between the groups: China is among the apparent leaders, South Africa and India balance on the boundary of this group, while Russia and Brazil are among the outsiders.
6.4.3. Universities' research and innovation activities in Russia - the current situation and development trends
The specifics of the Russian science which dates back from the Soviet period consists in a considerable unit weight in R&D of "traditional" scientific institutes, that is, institutes included in the system of state academies of sciences (the academic science), as well as research institutes and engineering offices subordinated to sectrorial departments and agencies (the sectorial science); the role of universities in this system is still rather modest. However, since the beginning of the 2000s till the present day, Russia has observed sustainable growth in the volume of R&D carried out by universities and the number of researchers engaged in that work, both in absolute and relative terms (Fig. 9). As a result, the number of researchers in the university sector increased by 50 percent, while the volume of R&D in constant prices, by 200 percent. It is to be noted that the highest growth rates were typical of the 2010-2011 period when on the back of the post-crisis revival of the Russian economy the government tried to draw a lesson from the crisis and ensure the "new quality" of economic growth, including by means of a search for new drivers. Universities were expected to become one of such drivers; their role was not confined to educational training alone, they were to become research and innovation centers and for that reason the government started to pay higher attention to research and innovation activities of the university sector (for more details, see below).
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Unit weight of university sector in internal expenditures on R&D (right-hand axis)
Unit weight of university sector in overall number of researchers (right-hand axis)
Fig. 9. The dynamics of research activities in the Russian higher education sector in 1995-2016
Source: own compilations based on SU-HSE, 2007; NRU HSE, 2018b.
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Growth in the university sector's expenditures on R&D took place on the back of funding of applied research. In the past few years, such research accounted for nearly a half of the university sector's research-related expenditures, while early in the 2000s, for slightly over one-third (Fig. 10). Interestingly, within the same period the unit weight of R&D, which is "contiguous" to the applied research, decreased dramatically.
Volume, thousand roubles in prices of 1989 (right-hand axis)
Fundamental research Applied research Developments Capital costs
Unit weight (left-hand axis)
■"Fundamental research
Applied research "^Developments O Capital costs
Fig. 10. The Russian university sector's internal expenditures on R&D in 2002-2016
Source: own compilations based on the data of SU-HSE, 2008b; NRU HSE, 2012b, 2013b, 2018b.
Despite substantial growth in absolute and relative indicators of the university science in the past few years, Russia is not among the leaders as regards the unit weight of R&D carried out by the university sector; it lags behind not only industrialized developed countries, but also some new industrialized nations and a number of post-Soviet countries and republics of the former USSR (Fig. 5). However, as was shown above, the universities' contribution to the overall volume of R&D, as well as the unit weight of all the researches working in them does not quite adequately reflect the extent of development of the country's university sector and its international competitiveness. Judging by the data of the main global university ratings, Russia is not among the leaders, either, as regards the "quality" of the leading national universities and their activities and is left much behind not only by the US, the UK and Switzerland, but also China, Korea and Finland (Fig. 6)1.
1 It is to be noted that as compared to foreign ratings the recently established "Three Missions of University" domestic international rating demonstrates much more optimism in respect of Russia's
It is noteworthy that in the past few years the presence of Russian universities in global ratings has largely expanded and consolidated (Fig. 11). However, this situation may be the result not only of the successful development of universities, but concentrated efforts to secure a ranking in the ratings and facilitate a subsequent advance upwards in them. One of the RF President's May 2012 Executive Orders determined as a baseline indicator of development of the university sector "the inclusion of at least five Russian universities into the global rating of the world's top 100 leading universities by 20201" (a special mechanism of state support- "Project 5-100" was established soon for that purpose). However, as the university rating methods are open, with such an approach used there is a serious possibility of the initial data being manipulated both by universities and other persons interested in early demonstration of this state policy's
success
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Fig. 11. Russian universities' positions in THE, QS and ARWU ratings in 2011-2018
Source: own compilations based on the data of THE World University Rankings, URL: https://www.timeshighereducation.com/world-university-rankings; QS World University Rankings, URL: https://www.topuniversities.com/qs-world-university-rankings; Academic Ranking of World Universities, URL: http://www.shanghairanking.com/index.html.
ranking by placing it in some distance from undisputable leaders - the US and the UK, but at the same level with Switzerland, China and Japan and above all other countries.
1 Executive Order No.599 of May 7, 2012 "On Measures on Implementation of the State Policy in Education and Science".
2 For more details, see, for example, Balatsky E., Ekimova H. (2012) Universities' Global Ratings: Manipulation Issue. The Journal of the New Economic Association, Issue No.1 (13), pp. 126-146.
3 Generally speaking, such an effect in its various manifestations was repeatedly recognized in economic papers that received a collective name of the Goodhart law (principle) (Goodhart, 1975; Arnold, Fowler, 2011).
In reviewing the ratings of Russian leading universities by component, it should be stated that they lag much behind the world's leaders as regards the rate of scientific citation. At the same time, there are parameters where Russian universities and not only the leading ones occupy positions next to the leaders, for example, the ratio between the number of professors and students (Fig. 12).
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Fig. 12. Average values of the components of the world ratings of the top three Russian universities
Source: own compilations based on the data of THE World University Rankings, URL: https://www.timeshighereducation.com/world-university-rankings; QS World University Rankings, URL: https://www.topuniversities.com/qs-world-university-rankings; Academic Ranking of World Universities, URL: http://www.shanghairanking.com/index.html.
As regards implementation by Russian universities of the third mission, it is to be stated that despite sustainable growth since the early 2000s in the volume of research carried out at the expense of the business, the universities' share in the overall internal expenditures on R&D has not seen any explicit upward trend and varied in the range of 23 percent -33 percent, while in the past few years stabilized at the level of 27 percent -28 percent with the share of state funding of the university science (including the public sector's companies' funds) explicitly reduced (Fig. 13). However, for the Russian science as a whole the relevant pattern looks even less promising: there has been sustainable growth in the unit weight of state financing of R&D and reduction of funding
University sector's internal expenditures on R&D, thousand roubles, in prices of 1989 (right-hand axis)
financed by business
financed by government*
University sector's unit weight on R&D (left-hand axis)
■ funds from business
state funds*
For reference: unit weight in overall volume of expenditures on R&D (left-hand axis)
• « funds from business
state funds*
* including funds of public sector entities.
Fig. 13. Funding by the business and the government of the university sector's internal expenditures on R&D in 1995-2016
Source: own compilation based on the data of SU-HSE, 2008b; NRU HSE 2018b.
The available official state statistics data do not permit to get an idea either of the number of higher education establishments networking with the business or the number of enterprises using the university science as a source of implementation of innovations, but with their use one can trace the quantitative dynamics of joint research projects carried out by industrial enterprises and universities, as well as innovation firms practicing such networking. The relevant data point to a rather modest but stable level of networking between industrial enterprises and universities accompanied by gradual
on the part of the business since the early 2000s.
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growth in the number of joint research projects, while the cooperation between the industry and research institutions has seen negative dynamics in the past few years (Fig. 14).
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Joint R&D projects of industrial companies' carrying out technological innova-tions (left-hand axis)
I with participation of research institutions
I with participation of universities
Share in total number of joint R&D projects of industrial companies carrying out technological innovations (right-hand axis)
carried out with participation of research institutions
carried out with participation of universities
Industrial companies carrying out technological innovations (left-hand axis)
■participating in implementation of joint R&D projects in partnership with research institutions
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
participating in implementation of joint R&D projects in partnership with universities
Fig. 14. Joint R&D projects of industrial companies with participation of universities and scientific research institutes in 2006-2016
Source: own compilation based on the data of SU-HSE, 2008a, 2009, 2010; NRU HSE, 2012a, 2013a, 2014, 2015, 2016, 2017, 2018a.
It is noteworthy that according to the above index of networking between universities and the business (Fig. 7) Russia, despite the explicit positive dynamics of the past few years, lags behind not only most industrially developed countries and new industrialized nations, but also a number of former Soviet republics.
Generally speaking, despite leading Russian universities' some advance in global ratings and gradual growth in the university sector's contribution to R&D, Russia is not among the countries which have succeeded in development of an entrepreneurial university.
6.4.4. State support for development of Russian higher education establishments: the main lines and instruments1
From the middle of the past decade, the government started to pay a considerable attention to the comprehensive development of the university sector with an emphasis
1 This section deals with state support measures and instruments which were initially aimed (completely or primarily) at universities. For this reason, funding of research projects within the frameworks of federal target programs (such as the "R&D in Priority Lines of Russia's Scientific and Technological
0
being made primarily on universities' research activities. The main formal and conceptual parameters of the state mechanisms of motivation of development of the university sector applied in 2005-2017 are shown in Table 28. Generally, the state policy in this field as in many others (in particular, the innovation policy1 and the industrial policy2) is characterized by prevalence of financial instruments (Fig. 15).
Note:
The dark color is used to specify the instruments which envisage financial support; * along with nonfinancial stimulation of the establishment of small innovation enterprises in 2010-2012, the Rosnauka and the Fund for Facilitation of Innovations rendered financial support to joint research projects of small innovation enterprises and research and educational centers (REC), however, this subline is accounted for in financial support for REC.
Fig. 15. The specifics of instruments of state support of universities
Source: own compilation.
Complex" Federal Target Program), grants of the Russian Scientific Fund and the Advanced Research Fund and other, in distribution of which universities act on equal terms with other recipients of support, are not taken into account.
1 Kuzyk M., Simachev Yu. (2013) The Russian Policy of Stimulation of Innovations: Evolution, Achievements, Problems and Results // Section 6.4: The Russian Economy in 2012. The Trends and Prospects (Issue No. 34). Moscow: The Gaidar Institute, pp. 521-571.
2 Simachev Yu., Kuzyk Moscow, Kuznetsov B., Pogrebnyak E. (2014) Russia on Its Way to New Technological Industrial Policy: Amid Inviting Prospects and Fatal Pitfall // Foresight, 8 (4), pp. 6-23.
Table 28
The main instruments of state support of universities
Instrument Period of application Nature of support Objectives and emphasis Requirements and limitations Scope
Support of projects of establishment and development of centers for collective usage of scientific equipment (CCU) Since 2005 Budget funding of projects Science: implementation of perspective multidisciplinary research projects in priority lines of development of science and technologies in Russian Federation, including in cooperation with world's leading scientific and research centers education: participation in training of experts and high-skilled personnel with utilization of CCU's instruments and equipment • Recipients of support can be federal research institutions and universities • volume of support of one project - up to RUB 100 million a year • at least 80percent of funds should be spent on purchasing of modern scientific equipment • support was rendered to about 600 CCU, half of them are at universities • recipients of support are over 150 universities • average volume of support of one project is RUB 25 million
"TEMP" program ("Technologies for Small Enterprises") 2005-2010 Financing by Fund for Facilitation of Innovations of R&D of companies which secured relevant licenses from universities Innovations: commercialization of developments carried out by universities and research institutions License is bought and used by small enterprise individually or together with large enterprise • funding of over 90 projects • average volume of support of one project is about RUB 9 million
Universities' innovative educational programs 2006-2008 Budget funding of programs Education: application of advanced educational technologies, methods of training and forms of organization of educational processes; ensuring of high quality of training; facilitation of competitiveness of graduates on labor market education, science and innovations: integration of educational, scientific and innovation activities • Volume of support of one program is up to RUB 1 billion • in selection, not only number of programs, but also condition and potential of universities were taken into account • support of programs of 57 universities; • average volume of support of one program is over RUB 500 million
"PUSK" program (Program of partnership between universities and companies) 2006-2009 Budget funding of research of universities and "quasi-budget" funding (Fund for Facilitation of Innovations) of R&D of small enterprises Science: development of new technologies; innovations: adaptation of technology to needs of specific enterprise with introduction into manufacturing education: training of experts in field of technology which is under development for subsequent employment at relevant enterprise • Volume of sales of one project is up to RUB 16 billion (aggregately for university and small enterprise) • support of 22 projects • average volume of support of one project is about RUB 12 million
Federal universities Since 2006 • Status (category) • in most cases - budget funding of development programs Education: implementation of innovative educational programs integrated into global educational space; system-based modernization of occupational education; training of personnel based on application of modern educational technologies for comprehensive social and economic development of region science: carrying out of fundamental and applied research in wide range of sciences science, education and innovations: integration of science, education and manufacturing, including by means of bringing outputs of intellectual activities to practical application • Federal universities were formed by instructions without open tender • federal universities were established on base of existing state universities; in most cases their consolidation took place through affiliation of other higher and secondary education institutions • budget funding was envisaged by only 8 development programs • 10 federal universities incorporating about 30 universities were established; • Average volume of support of one program is about RUB 400 million
Instrument Period of application Nature of support Objectives and emphasis Requirements and limitations Scope
National research universities Since 2008 • Status (category) • budget funding of development programs (within five years) Education: providing personnel for priority lines of development of science, technologies , engineering, various economic sectors and social sphere science and innovations: development and introduction of high technologies in manufacturing • It was established initially that for receipt of NRU status, university should carry out on equal basis both educational programs and fundamental and applied research in broad spectrum of sciences • in selection, parameters of university, its potential and efficiency, rather than quality of presented program were primarily taken into account • Status of NRU was assied to 29 universities • average volume of support of one program is RUB 1.7 billion
Leading classical universities Since 2009 (legal formalization) • Status • budget funding of development programs (within 10 years) Science and education: development of unique science and education complexes of great importance for development of Russian society Formal assignment of special position of two largest Russian universities • Status was assigned to Lomonosov Moscow State University and St. Petersburg State University • volume of support of each program is over RUB 10 billion
Support of research carried out by teams of research and educational centers (REC)1 2009-2013 Budget funding of research projects Science: achievement of scientific results of global level in wide range of scientific research and formation of effective and economically viable research teams education: inclusion of postgraduates and students in research teams Volume of support of 1 project is up to RUB 1.5 million-RUB 15 million (depending on category, subject area and year of beginning of project) • Support of over 3,000 projects with participation of universities • support was received by about 250 existing universities • average volume of support of one project is about RUB 4 million
Stimulation of establishment by universities of small innovative enterprises (SIE) Since 2009 • Prospects of establishment of SIE and allocation them with property • prospects of utilization by SIE of simplified scheme of taxation • reduced rates of contributions to state extra-budgetary funds form SIE Innovations: introduction of intellectual activity outputs which rights belong to universities and research institutions Mechanism is oriented at state and municipal budget-funded entities; tax and other privileges are applied only to SIE established by such entities 2,600 SIE established by 289 existing universities are officially accounted for
Support of joint project between universities and companies on development of high-tech manufacturing (Resolution No.218) Since 2010 Budget subsidies to companies on funding of R&D carried out by universities within project frameworks Innovations: support of cooperation between universities and companies; optimization of financial, organizational and regulatory mechanisms and facilitation of effective sustainable public-private partnership in implementation of integrated joint projects of universities and enterprises • Volume of support of one project is up to RUB 130 million -RUB 300 million (depending on duration and year of beginning of project) • state's immediate counterparty is not university, ultimate recipient of support, but company which carries out project • Support was rendered to over 400 projects with participation of over 100 universities • average volume of support of one
1 REC is a structural unit (a part of a unit or the aggregate of units) of a university or a R&D and manufacturing entity carrying out general scientific research and training of high-skilled scientific personnel in compliance with the statutes on REC approved by the head of the entity.
Instrument Period of application Nature of support Objectives and emphasis Requirements and limitations Scope
science: determination of available scientific developments and identification of institutes or groups of researchers with potential to solve real objectives of development of knowledgeintensive productions; introduction of modern institutional and management principles of carrying out applied research and development at universities by required lines of high-tech production upgrading education: updating of educational programs and subjects areas of research in conformity with modern requirements of technology market • result of each project should be establishment of high-tech manufacturing of new or upgraded products project is about RUB 150 million
Programs of development of innovative infrastructure of universities (Resolution No.219) 2010-2012 Budget funding of infrastructure development programs Innovations: formation of innovative environment; promotion of networking between universities and enterprises; support of establishment of SIE by universities • Volume of support of one program is up to RUB 150 million. • Federal universities could be recipients of support • For receipt of support, university should carry out fundamental and applied research in priority lines of development of science, engineering and technologies and implement a complex of measures aimed at upgrading innovation infrastructure • In tender-based selection, not only presented programs, but also universities' research, educational and innovation potential were taken into account • Support of 78 programs of 76 existing universities • Average volume of support of one program is RUB 115 million
Support of research led by prominent scientists (Resolution No.220) Since 2010 Budget grants on research Science: development of integration of Russian science into global scientific space; promotion of mobility and circulation of research personnel; promotion of international scientific cooperation; promotion of universities' activities in R&D and development of their scientific and research potential; attainment of scientific results of global importance; facilitation of establishment of competitive research labs; science and education: training of research personnel; integration of university science with training of high-skilled personnel; engagement of students and postgraduates in prospective scientific research led by prominent scientists; upgrading of quality of higher education; training and advanced training of research personnel; upgrading of vocational self-actualization of talented young people and securing of their position in Russian science; science and innovations: development of science and innovations in higher education • grant's volume: up to RUB 90 million - RUB150 million (depending on year of beginning of project) with prospects of additional financing in case of extension of project • Prominent scientist should take leading position in determination of field of science • University's students and postgraduates should be part of research team • 185 grants were allocated to 65 universities • Average volume of support of one research is about RUB 130 million
Instrument Period of application Nature of support Objectives and emphasis Requirements and limitations Scope
system; facilitation of growth in number of papers with high rate of citation and (or) patent applications for inventions
Programs of strategic development of universities 2012-2014 Budget funding of development programs Education: harmonization of pattern of vocational education with labor market requirements and strategy of social and economic development of region or sector; active introduction of new methods and technologies in educational process, modernization of labs and experimental base, formation of resource base in accordance with priorities in development of university; upgrading of efficiency of steering of universities, development of best steering practices and formation of institutes of strategic management in accordance with labor market requirements, goals of social and economic development of regions and perspective lines in science and technologies science, education and innovations: sustainable development of universities in such lines as talent pool, infrastructure of educational process and research and efficiency of educational, scientific and innovation activities; upgrading of competitiveness of universities at domestic and international level • Volume of support of one program: up to RUB 300 million • recipients of support were only federal universities subordinate to Ministry of Education and Science of Russian Federation; • universities which received budget funding for implementation of other development programs could not be recipients of support • Support of 55 programs • average volume of support of one program is about RUB 280 million
Support of programs of high-skilled personnel training for regions' enterprises and entities ("Personnel for Regions") 2013-2015 Budget fUnding of projects Education: actualization of educational activities of university to prepare human resources for priority lines of economic development science: development of scientific infrastructure (including renewal of material and technical base) for implementation of project • Volume of support of one project is up to RUB 100 million • federal universities subordinate to Ministry of Education and Science of Russian Federation and in regions where there were no universities which won tenders for funding of projects with volume of over RUB 90 million a year held by Ministry of Education and Science of Russian Federation in 20062013 were only recipients of support • Support of 14 projects • average volume of one project is about RUB 50 million.
Support of leading universities in order to promote their competitiveness among world's leading research and educational centers (" 5-100 Project") Since 2013 • Budget fUnding of development programs • status of project participant Science and education: development of leading universities to upgrade their competitiveness among world's research and educational centers; listing of at least five Russian universities in rating of world's top 100 leading universities by 2020 Recipients of support were only universities which were included in international ratings and met formal requirements (as regards number of students and postgraduates, volume of expenditures on R&D, number of publications and other) • Participants in project are 21 universities for rare exception of NRU and FU • average volume of support of one program is about RUB 3.8 billion
Support of projects of establishment and development Since 2013 Budget funding of projects (state assignment) Innovations, education and science: formation on university base and with their participation of universities of network of • Recipients of support were only federal universities subordinate to Ministry of • Support of 49 projects • average volume of
Period of Nature of
Instrument application support Objectives and emphasis Requirements and limitations Scope
of engineering centers rendering engineering Education and Science of support of one
centers on the services to real sector entities Russian Federation project is about
base of engaging in training of personnel • to receive support, RUB 90 million
universities in engineering field and carrying out development of best available technologies and innovative R&D university should be oriented on R&D and training of personnel in engineering lines • to receive support, university should establish separate legal entity whose volume of services to real sector is major target indicator, however, recipient of support is not that legal entity, but university • at least half of allocated funds should be spent on purchasing of equipment, software and intangible assets
Support of Since 2015 • Funding of Education: in-depth student • Recipients of support are • Recipients of
programs of projects on training based on introduction of only federal universities support were
training of purpose adaptive system of practically subordinate to Ministry of over 80
personnel for training (state oriented purpose development of Education and Science of universities
military- assignment) competences within frameworks Russian Federation • average
industrial and of networking and cluster volume of
complex (MIC) infrastructure cooperation between universities support per one
("New Personnel facilitation of and MIC enterprises university is
for MIC" purpose about RUB 13
program) training million
Backbone Since 2016 • Status Science, education and • Volume of support of one • 33
universities • funding of innovations: social and program is up to RUB 600 universities were
portion of economic development of million selected: 19
development regions, including by means of • recipients of support are universities -
programs out establishment of university only federal universities development
of federal centers for innovative, • excluded from sphere of programs were
budget technological and social support are federal and national supported out of
• funding of development research universities, federal budget,
other participants in 5-100 Project, as 14 universities -
development well as universities of Moscow regional budget
programs out and St. Petersburg support;
of regional • only one backbone • Average
budgets university should be situated in one municipal entity • in selection of backbone universities, quality of their programs matters more than characteristics of universities volume of support of programs out of federal budget -about RUB 200 million
University Since 2017 • Status Science, education and Formally declarative procedure 51 universities
centers of • funding of innovations: involvement of for recognition of universities were officially
innovation, transformation universities in handling of issues as university centers subject to recognized as
technological programs out of sustainable social and tough filtration: university university
and social of regional economic development of should be participant in 5-100 centers
development of budgets Russian Federation and subjects Project, federal and backbone
regions of Russian Federation; capitalization of educational, scientific and technological results in region's sectors science and education: participation in creation of conditions for system networking between research entities and enterprises through establishment of baseline departments and joint implementation of educational programs and research projects; development of conditions for implementation of project-oriented educational programs meant for team realization of full life cycle projects science: harmonization of lines of applied research with Strategy of university or meet formal requirements
Instrument Period of application Nature of support Objectives and emphasis Requirements and limitations Scope
Scientific and Technological Development of Russian Federation; education: participation in facilitation of conditions for permanent education, promotion of information, financial and legal literacy of individuals and development of vocational competences of professors
Target budget investments Annually Target financing of investment projects Depending on specific projects State universities • In 2005-2017 about 300 universities were recipients of budget investments • average volume of support per one university is about RUB 1 billion
Source: own compilation based on regulatory and statutory acts and procedural and reporting documents and materials of official Internet-sites of state authorities, as well as projects, programs and instruments of support.
The state support measures were not always of a program nature; their initiation and application was often accompanied by assignment of a special status or category to universities. The state policy's main emphasis was made on the development of universities' material and technical base: a large portion of instruments originally pursued specific purposes (target budget investments, support of projects related to establishment of CCU and engineering centers, programs for development of innovation infrastructure, stimulation of establishment of small innovation companies and other), while in a number of other instruments a similar emphasis is traced de facto (innovative educational programs, and programs of development of federal, national research universities and leading classical universities).
As regards implementation of the three main missions of universities, it is noteworthy that most measures of support are "at the junction" of two missions - educational and research (Fig. 16) - so they are more related to support of universities of the former formation, that is, research universities, rather than entrepreneurial universities.
In 2005-2017, the overall volume of federal budget support of universities exceeded RUB 600 billion, which amount is comparable with the total government investments in the same period into all the state institutes for development: the Vneshekonombank, the ROSNANO, the Skolkovo Fund, the RVC and other1. The largest volume of support - about RUB 80 billion-RUB 90 billion - was observed in the 2011-2014 inter-crisis period when the government, on one side, was much concerned with a search for and "cultivation" of new drivers of sustainable growth (universities were expected to become one of such drivers), while, on the other side, did not switch over yet to handling
1 For more details, see: Simachev Yu., Kuzyk M. (2017) The Effect of State Institutes for Development on Innovation Behavior of Companies: Quality Effects // Voprossy Ekonomiki, Issue No.2, pp. 109135.
of new issues, which arose as a result of changes in the foreign policy and foreign economic situation, such as reduction of dependence of backbone industries on the imports.
RESEARCH EDUCATION
INNOVATIONS
Note: hereinafter the following abbreviations are used:
CCU is support of development of centers for collective usage of research equipment; TEMP is the "Technology for Small Business" Program; IEP is innovative educational programs;
PUSK is the "Partnership between Universities and Companies" Program;
FU is federal universities;
NRU is national research universities;
LCU is leading classical universities;
REC is support of research and educational centers;
SIE is stimulation of establishment by universities of small innovation enterprises;
218 is support cooperation between universities and companies within the frameworks of implementation of projects on establishment of high-tech manufacturing (Resolution No.218 of April 09, 2010 of the Government of the Russian Federation);
219 is programs of development of universities' innovation infrastructure (Resolution No.219 of April 09, 2010 of the Government of the Russian Federation);
220 is support of scientific research led by prominent scientists (Resolution No.220 of April 09, 2010 of the Government of the Russian Federation);
PSD is programs of strategic development of universities;
PfR is support of projects related to training of high-skilled human resources for enterprises and entities of various regions ("Personnel for Regions");
EC is support of establishment and development of engineering centers;
5-100 is support of leading universities to promote their competitiveness among the leading international research and educational centers (the "5-100" Project);
HRfMIC is support of programs of the system of training of human resources for MIC ("New HR for
MIC" Program);
BU is backbone universities;
UC is university centers of innovative, technological and social development of regions; SPBI is special-purpose budget investments
Fig. 16. The focus of state support instruments aimed at development of universities
Source: own compilation
0 ---.---
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Support of leading universities to promote their competitiveness (5100 Project)
■ 1 Program of Strategic Development
..........Support of research led by leading scientists (Resolution No.220)
Program of development of innovation infrastructure (Resolution No.219)
Support of joint projects of universities and companies (Resolution
No.218)
Programs of development of leading classical universities)
......Programs of development of federal universities
irmmmn Support of research carried out by research and educational centers' teams
■ ■ Programs of development of national research universities
Innovative educational programs Special-purpose budget investments SSRiilSiilSii! Other instruments of support
^^^ For reference: internal costs on R&D in higher education sector
* funds of budget of all the levels and public sector entities.
Fig. 17. Volumes of federal budget financial support of universities in 2005-2017
Source: own compilation based on regulatory and statutory acts, reporting documents and materials of the official Internet-sites of state authorities, as well as projects, programs and instruments of support; Indikatory Nauki (Indicators of Science), 2018: Statistical Bulletin. Moscow, NRU HSE.
The largest overall volume of university funding is ensured through special-purpose budget investments. This line of support exceeds several times over other mechanisms of state support of universities, among which, in its turn, the leaders are the support of joint projects of universities and companies within the frameworks of Resolution No.218 of April 09, 2010 of the Government of the Russian Federation, the "5-100" Project, as well as support of programs of development of NRU and federal universities
(Fig. 18). At the same time, if the volumes of budget funds per project or program are concerned, the apparent leader is the financial support of programs of development of leading classical universities followed by the support of universities within the framework of the "5-100" Project.
In 2005-2017, 414 universities1 or nearly a half of their total number received state support. It is to be noted that the overwhelming majority (97 percent) of the beneficiaries are attributed to the state pattern of ownership. As a result, in the period under review 80 percent of state and municipal universities functioning in 2017 and the mere 4 percent of non-government higher education institutions received one or another form of state support. Undoubtedly, such a situation is justified primarily by the fact that most instruments of support are aimed only at state universities, however, the mechanisms which are officially meant for entities of any pattern of ownership are actually rarely applied to non-government universities.
If the "coverage" of individual measures and instruments applied to different entities - the number of beneficiary-universities - is concerned, the leaders in this regards are special-purpose budget investments and the stimulation of the establishment of small innovation companies (each of the above two measures is applied to nearly 300 universities), as well as the support of research carried out by REC's teams (about 250 universities are recipients of this support).
It is worth mentioning the uneven distribution of state support in the university sector: nearly two-thirds of the universities failed to receive any support in the period under review or used only one instrument of support, while 5 percent of the universities were the beneficiaries of ten or more instruments of support (Fig. 19). The leaders as regards the number of utilized lines of state support are large regional universities: Tambov State University (TSU), the Tomsk Polytechnic University (TPU), the Novosibirsk State Technical University (NSTU), the Samara State Aerospace University (SSAU) and the Ural Federal University (UFU). Interestingly, one can see among universities, which are beneficiaries of multiple instruments of support, not only universities which are listed permanently on global university ratings, but also less renowned ones, such as the Don State Technical University or the Petrozavodsk State University.
The uneven nature of state support of universities is even more explicit in distribution of budget funding: in 2005-2007, the mere 3 percent of universities accounted for nearly a half of all the allocated federal budget funds. The leaders were the NRU HSE, the Lomonosov Moscow State University, the St. Petersburg State University and the Moscow Institute of Physics and Technology; all the above universities are situated either in Moscow or St. Petersburg.
1 Strictly speaking, the number of universities - recipients of support was somewhat higher, but a portion of them was reorganized through affiliation with other entities of the higher education sector.
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■ Average volume of federal budget funding of one project/program, billion roubles* (right-hand axis)
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Fig. 18. The volume of federal budget funds distributed within the frameworks of different instruments of financial support of universities
Source: own compilation based on regulatory and statutory acts, reporting documents and materials of the official Internet-sites of state authorities, as well as projects, programs and instruments of support.
16 14 12 10
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Number of utilized instruments of support (left-hand axis)
The total amount of financial support from the federal budget, billion rubles. (right scale)
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Fig. 19. Distribution of universities by the number of utilized instruments of support and the volume of received federal budget funds in 2005-2017
Source: own compilation based on regulatory and statutory acts, reporting documents and materials of the official Internet-sites of state authorities, as well as projects, programs and instruments of support.
The unevenness of the state support can be clearly seen at the level of individual instruments which envisage the possibility of repeated utilization thereof by one and the same university. For example, six universities - the Lomonosov Moscow State University, the Moscow Institute of Physics and Technology, the Bauman Moscow State Technical University, NRU ITMO and the Ural Federal University account for one-fifth of more than 400 joint projects between universities and companies on development of high-tech manufacturing. The distribution of megagrants on carrying out of research led by prominent scientists is even more uneven. A quarter of such grants was provided to four universities: the Lomonosov Moscow State University, the Novosibirsk State University, the Moscow Institute of Physics and Technology and the St. Petersburg State University. In addition, the Moscow State University has become the apparent leader as regards the support of research carried out by REC, having received almost one-third of the relevant funding distributed between universities. The NRU HSE surpasses explicitly other universities as regards the volume of special-purpose budget investments, having become the recipient of 9 percent of such allocations to the university sector in 2005-2017. The Ural Federal University (UFU) is an undisputed leader as regards organization and development with the state support of centers for collective usage of research equipment; the UFU' pattern includes nearly a dozen and a half of such infrastructure facilities.
Generally, within the frameworks of the state policy of stimulation of development of the university sector one can clearly see the two main lines: the first one - horizontal -includes instruments aimed at a broad range of recipients, relatively moderate (as compared with the other category of instruments) volumes of support of each individual program or project and support to universities which did not receive it before. The other
line - vertical - envisages a large-scale target financial support of a small group of the "privileged" universities (Fig. 20). In addition, some instruments of support occupy an intermediate position between these two lines. Special-purpose budget investments are vertical by virtue of their targeting nature, however, they cover a wide range of universities and not necessarily the best and renowned ones. In addition, at the juncture of the horizontal and vertical policies there are universities' innovative educational programs which actually used to perform the role of the predecessor of NRU, as well as the support of joint projects between companies and universities and megagrants on research lead by prominent scientists within frameworks of which the high rate of repetition of support was combined with efforts to cover new universities.
Note. The area of circles corresponds to the aggregate federal budget funding volumes.
Fig. 20. The scope of application of instruments of state support of the university sector (as of the end of 2017)
Source: own compilation based on regulatory and statutory acts, reporting documents and materials of the official Internet-sites of state authorities, as well as projects, programs and instruments of support.
In reviewing any lines and instruments of the state policy, a principle question arises whether the instruments used by the government proved to be effective. The available official data and materials neither provide an exhaustive answer, nor permit to get any ideas to come closer to it. On one side, throughout the entire period of state support a number of important parameters of the university sector's functioning saw an upward trend. On the other side, growth of relevant indicators started before the large-scale state support of universities and took place amid positive dynamics of the entire range of baseline macroindicators.
Generally speaking, to receive the required evidence of efficiency of the state policy it is necessary to identify both the effects which were received thanks to the instruments used by the government and effects which would not have been achieved in case of absence of such instruments. It is important to take into account not only direct outputs
of the support, but also indirect effects, including changes in the behavior of beneficiaries of support and their counterparties1. It is to be noted that both direct, indirect and, particularly, behavioral effects often take place with a substantial delay of up to several years. At present, there is no such practice of assessment used by the Russian state management system. Strictly speaking, this makes it impossible to provide well-founded judgments and conclusions not only in respect of the efficiency of the state policy of support of the university sector ( as well as other sectors), but also the sustainability and viability of positive changes achieved if the support is stopped.
As regards the efficiency of the state policy of support, one cannot get an answer, either, in reviewing the rankings of Russian universities in the leading international ratings. On one side, in the past few years the presence of Russian universities in ratings has greatly increased: in 2018 as compared to 2013, the number of Russian universities in the QS rating, the ARWU rating and the THE rating increased 1.6-fold, 6-fold and 35-fold, respectively (!) (however, in case of ARWU and THE a low base effect was observed; in the period under review the total number of Russian universities with an assigned rankings increased substantially by 2-fold and 3-fold, respectively). In addition, relatively high rankings are often assigned to universities which are recipients of large volumes of support (Fig. 21).
On the other side, the whole range of actively supported state universities, including some federal and national research universities are not present for different reasons in any major global ratings. In addition, unlike the QS rating where the rankings of most Russian universities have been seriously upgraded of late, in the THE rating a larger portion of Russian universities demonstrated negative dynamics. Interestingly, the greatest progress (or the lowest regress) is generally typical of universities which are participants of the "profile" 5-100 Project aimed at upgrading the official rankings of Russian universities in global ratings, which situation in accordance with the abovementioned Goodhart principle may be the evidence not of the actual upgrading of universities' performance, but artificial overstatement of quantitative indicators used in rating.
1 As a recent example of application of such an approach in Russia, see Simachev Yu, Kuzyk M., Zudin N. (2017) The Results of Fiscal and Tax Support of Russian Companies: Complementarity Check // The Journal of the New Economic Association, Issue No.2, pp. 59-93.
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Innovative educational programs
□
■ ■
Programs of development of federal universities
Programs of development of national research universities Programs of development of leading classical universities Support of joint projects between universities and companies (resolution no.218)
Support of research led by prominent scientists (resolution no.220)
Support of leading universities to promote competitiveness ("5-100" project)
Special-purpose budget investments Other financial support instruments
Ranking in OS rating (right-hand axis)
2018/2019
Year when university appeared in rating
Fig. 21. The overall volume of federal budget financial support to universities in 2005-2017 and rankings of universities in the QS rating
Source: own compilation based on regulatory and statutory acts, reporting documents and materials of the official Internet-sites of state authorities, as well as projects, programs and instruments of support; QS World University Rankings, URL: https://www.topuniversities.com/qs-world-university-rankings.
30
25
20
5
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To our opinion, the idea of a positive effect of the state support on rankings of universities in global ratings is quite realistic, and since the effects of support, as it was already stated, often occur with a substantial delay universities which are either not included in the ratings or have very low rankings may achieve success in the near future. However, it should be repeated again that without the practice of comprehensive assessment of state support used to identify a broad spectrum of effects on universities and separate those effects from the results of influence of other factors, one can assume quite the opposite: the utilized instruments do not effectively facilitate the global competitiveness of Russian universities, while upgrading of rankings of some universities is a result both of a favorable combination of circumstances and intentional manipulations.
* * *
At present, there is a number of evidence pointing to the growing influence of the university sector on the economic development. This factor is often related to the formation and development of a new generation of entities of the higher education sector, that is, entrepreneurial universities.
The "ideal image" of a modern entrepreneurial university is described in detail in the economic literature. The main specifics of an entrepreneurial university consists in the fact that along with educational and research functions it deals with "integration" of human resources it prepares and the knowledge and technologies it creates and develops into the economy and the society in general, thus becoming a key agent of long-term development. Despite the fact that it maintains continuous networking with the government and the business and receives from them the required funds and ideas for its own development, such a university preserves its complete independence in making decisions as regards its specific lines of development. In its turn, the university is an association of closely related independent creative teams managed by the single steering core and guided by the entrepreneurial spirit and culture which make them "ideologically" close to successful innovation firms. Owing largely to their activities, the university is able to go beyond the traditional frameworks of an educational and research institution and actually acts as a diversified corporation which not only produces, but also successfully "realizes" the knowledge and human resources required by the economy and the society in general.
It is noteworthy that the gathering "under the same roof" of a modern university of educational, research and innovation activates entails not only benefits and advantages, but also considerable risks of which the most serious one, in our view, consists in explicit domination of some types of activities to the detriment of others. However, if the innovation activities are able to generate substantial revenues, while perspective scientific projects contribute to consolidation of the academic reputation of the researchers who carry out them, various units and the university as a whole through
reports, publications, quotations and other, as well as permit to attract relevant grants, the educational activities look the least attractive in this situation because the outputs of educational activities become evident only in the long-term prospect, that is, in graduates' successful professional trajectories1. For this reason, it is necessary to avoid within the frameworks of functioning of the university any imbalances providing immediate benefits, but entailing risks in the long-term prospect. It is to be noted that according to the opinion of a number of experts the facilitation of the balance between the three main components of the university's activities - education, science and commercialization of the developed technologies - is the objective of the state policy2. Without going into discussion of this point of view, it is important to stress that the government's involvement should be like a "fine tuning" and not in the form of directive instructions or "quotas" for specific types of activities, otherwise, a fundamental principle of an entrepreneurial university - independent decision-making within the limits of professional competence - may be undermined.
Undoubtedly, theoretical models of a modern university are idealized to some extent, however, it is to be noted that they have quite real grounds: the "prototypes" of the model of an entrepreneurial university are the world's leading universities, primarily, in the US and Western Europe: the Massachusetts Institute of Technology, the Stanford University, the Cambridge University and other3. At the same time, only a small number (across the nation) of elite universities in countries with developed science meet the criteria of an entrepreneurial university. A kind of exception is the US where research and innovation activities are not concentrated with a small group of "elite" universities, but carried out by numerous higher education establishments.
It is noteworthy that the real level of development of the national sector of higher education as a whole and the university science, in particular, correlates weakly with the unit weight of the higher school in R&D: as regards this indicator Russia is comparable, on one side, with the US, Japan, Israel and Korea, while, on the other side, with Kirgizia, Tajikistan and Moldova. The role of the university sector is determined to a greater extent by the level of the "quality" of a country's leading universities, particularly, in terms of all the three major components - educational, scientific and entrepreneurial -of their activities. In such a context, all the industrially and economically developed countries of Western Europe, North America and Asia have advanced considerably in establishment of entrepreneurial universities.
1 Belyaeva L., Belyaeva M. (2017) University Science: Logistic Turn // Pedagogical Education in Russia, 2017, Issue No. 1, pp. 135-214.
2 Schartinger D., Polt W., Gassler H., Shibany A. et al. (2002) Good practice in industry-science relations. // European Commission. Benchmarking papers No 5/2002. Luxembourg: Office for Official Publications of the European Communities.
3 Etzkowitz H., Webster A., Gebhardt C., Cantisano Terra B.R. (2000) The Future of the University and the University of the Future: Evolution of Ivory Tower to Entrepreneurial Paradigm. // Research Policy, 29(2), pp. 313-330; Vissema J. (2016) The Third Generation University: University Steering in the Transition Period. [Translated from English]. - Moscow, The Olimp-Business Publishers.
At present, Russia is not objectively among the leaders as regards introduction of the model of an entrepreneurial university. The situation is complicated by the fact that the Russian university sector has inherited from the Soviet period a back-seat role in generating knowledge and transforming it into commercial products and technologies; despite growth for nearly 20 years in quantitative indices of the university sector's research activities this role has not changed much.
In the past decade, the government has made great efforts to promote research and innovations in the university sector, particularly, after 2009 when it was drawing a lesson from the crisis and sought to facilitate a "new quality" of economic growth. Unlike other numerous lines of the government's activities, the state policy of support of the university sector has its own internal logic, though not quite indisputable one. So, the instruments of a broad "coverage" (stimulation of establishment of innovation firms and support of the projects of CCU and REC) were supplemented with the instruments of support of a small number of leader-universities (programs of development of national research, federal and leading classical universities, as well as the 5-100 Project). Also, it is important to notice the succession of some measures in relation to others: for example, a large-scale short-term support of innovative educational programs has overgrown into a situation where a larger portion of those programs was assigned the permanent status or category; federal and national research universities made up a bulk of participants in the "5-100" Project and this participation in its turn, along with the status of a federal and backbone university, made it easier for them to receive the official recognition as a university center for development of the region.
Generally, within the frameworks of the government's policy of development of the university sector there are two quite different and virtually "transversal" lines. The first line of development envisages a large-scale support of a narrow circle of leader-universities; it is to be noted that the relevant instruments of support were substantially developed in the 2020-2013 inter-crisis period. The other line of development was originally aimed at a broad range of beneficiary-universities and involvement in the state support "orbit" of new players: for this reason, some mechanisms include limitations on participation of universities which were earlier involved in other schemes of support.
As regards the efficiency of the government's instruments aimed at promotion of research and innovation activities in the university sector, this issue remains open. Taking into account the extended period of state support and its substantial volumes, it is believed that it has had a positive effect on development of the university sector as a whole and promotion of the competitiveness of Russian leading universities, though it cannot be stated unambiguously. At the same time, a very high concentration of the support, particularly, financial support, its recurrence and the existence of a relatively small number of permanent "consumers" in proportion to the size of the university sector suggests that the horizontal line of development aimed at the maximum coverage of universities lacks efficiency. Certainly, weak coverage of Russian universities by officially "large-scale" instruments of support can be explained by the fact that a large portion of them are weak and take a passive stance. However, there are limitations on
provision of support both formal - related to the university's form of ownership, departmental subordination and other - and informal, for example, a so-called "effect of Matthew" which is widespread in the state policy when the receipt by an entity of the state support makes that entity more accessible in future1.
So, with unquestionable importance of support being rendered for development of national leader-universities, the potential of the state influence on promotion of competitiveness of the university sector consists in stepping up the development of the "broad strata" of the Russian university sector. According to the outputs of the research carried out earlier, budget funding mechanisms which traditionally prevail both among the instruments of the state support of universities and in other lines of the state policy suit quite well when they are aimed at specific targets, while for facilitation of a mass coverage it would be better to utilize fiscal instruments, standardization measures, as well as properly "adjusted" activities of institutes for development2.
Returning to the issue of practical implementation in Russia of the model of an entrepreneurial university, it is to be admitted that the state policy of support of the university sector (and particularly its leading representatives) is aimed de facto at development of the former generation of universities - research universities - rather than entrepreneurial ones. One can agree in this context with the opinion of M. Sokolov that the leading idea of large-scale government's initiatives of the past few years meant to modify the existing university landscape, such as the assignment of categories, support of programs of national research universities and facilitation of the 5-100 Project, was "a research turn, that is, efforts to assess and reward universities on the basis of their compliance with the ideal model of an entrepreneurial university"3. The government's relevant activities have had a certain effect: Russia has formed a group of research universities, which effectively combine (or at least able to combine) educational and research activities. However, the number of representatives of this group in different types of research is estimated at about 20-40, while in most Russian universities educational activities are still the prevailing ones4,5.
1 See, for example: Crespi, F., Antonelli, C. (2011). Matthew effects and R&D subsidies: knowledge cumulability in high-tech and low-tech industries. University 'Roma Tre'. Departmental Working Papers of Economics, № 0140.
2 Ivanov D., Kuzyk M., Simachev Yu. (2012) Stimulation of Innovation Activities of Russian Manufacturing Companies: New Opportunities and Limitations. Foresight, 6 (2), pp. 18-41; Simachev Yu., Kuzyk M., Ivanov D. (2012) Russian Financial Institute for Development: Right Way? // Voprosy Ekonomiki, No.7, pp. 4-29.
3 Sokolov M. (2017). The Myth about University Strategy // Voprosy Obrazovania, Issue No.2, pp. 36-73.
4 In academic circles (primarily among the representatives of the academic science) there is a widespread opinion that in Russian realities universities can hardly become effective centers for research and transformation of research outputs into manufacturing, so they should concentrate their efforts on training of high-skilled human resources for the needs of the economy (See, for example, Polterovich, 2016).
5 Abankina I., Aleskerov F., Belousov V., Gokhbert L., Zinkovsky K., KIselgof S., Shvydun S. (2013) The Typology and Analysis of Research and Educational Efficiency of Russian Universities // Foresight,
It is noteworthy that in the period of "the roaring 1990s" Russian universities approached to some extent the model of an entrepreneurial university, having gained a greater independence from the state than before and finding themselves in a situation where they had to look for funds on the market. Universities' units became more self-dependable and their activities, entrepreneurial1. However, diversification of funding of universities was ensured mainly through their rendering of paid services, as well as carrying out of other activities (including often non-core utilization of the property) with the research activities being on a downward path. That practice permitted universities to survive in the short-term prospect, but undermined their long-term development2. In the past few years, one can see quite the opposite process: on one side, universities have been developing quite successfully their research activities owing, primarily, to the large-scale state support, while on the other side with a formal diversification of channels of financing their dependence on the state has probably grown.
In addition, due to the fact that in the past decade the centralization of university management has greatly increased university units have lost much of their former independence and their entrepreneurial initiatives, both positive and negative in terms of long-term development, became limited3.
According to T. Klyachko and Vladimir Mau, the growing uncertainties of the external environment which surround modern universities and create the impression of a crisis in their development should not be disregarded. As regards Russia, the main external challenge for universities is a change in the economic model and the growing uncertainty of economic development4.
In conclusion, it is to be noted that unlike some other experts in our opinion it is feasible to solve the objective of establishing entrepreneurial universities in Russia. However, it requires from the state, which is traditionally the main actor and driver of the development of the university sector, substantial changes, not only in implementation of the policy in the relevant field, but also in its approach to the university sector. Firstly, in stimulating the development of the university sector the state should pay more attention to fulfillment by universities of their third (innovation) mission. Secondly, the state should give universities more independence in determining the lines of development and methods to be used by switching over from the model of "quasitotal control" to the model of "quasiequal partnership" However, in present conditions the latter, as opposed to the former, seems highly unlikely.
7 (3), pp. 48-63; Kuzminov Ya., Semenov D., Frumin I. (2013). The Pattern of the University Network: From Soviet to Russian "Mater Plan". Voprosy Obrazovania, Issue No.4, pp. 8-69.
1 Sokolov M. (2017). The Myth about University Strategy // Voprosy Obrazovania, Issue No.2, pp. 3673.
2 Kuzminov Ya., Semenov D., Frumin I. (2013). The Pattern of the University Network: From ot Soviet to Russian "Mater Plan". Voprosy obrazovania, Issue No.4, pp. 8-69.
3 Sokolov M. (2017). The Myth about University Strategy // Voprosy Obrazovania, Issue No.2, pp.36-73.
4Klyachko T.L., Mau V.A. The Future of Universities. Moscow, The Delo Publishers, 2015.pp. 28, 59.
6.5. Limited liability companies (1998-2018): justice versus common law1
6.5.1. Limited liability companies as principal business conduct in Russia
Legal framework of a limited liability company emerged in 1892 in Germany (Gesellschaft mit beschrankter Haftung,GmbH). It did not have any prototypes or models and was artificially created by German Ministry of Justice and approved as a law. Introduction of this legal framework owed largely to strengthening of shareholding legislation, which took place in 1884 as a follow up of a period when shareholding companies popped up using money collected from households in exchange of promise of high interest and accompanied by numerous fraud and abusive practices, taking advantage of liberalism of German shareholding legislation of that time2.
Small and medium size entrepreneurs needed the opportunity to set up corporations with a low number of participants, relatively small assets and way of secession more complicated than in a shareholding company.
Such a corporation was liable for is debts and participants were exempted from corporation's debts, which made this legal framework attractive. Organizational design required by a limited liability company was adopted from a shareholding company and, therefore, they are frequently called "a younger sister of a shareholding company" in Germany or "small shareholding company".
Limited liability companies became the most popular form of entrepreneurship in Germany: at present, their number exceeded one million and they account for one third of all produced goods and services.
In addition to Germany, limited liability companies exist somehow in a number of civil law countries, i.e. in France (societe a responsabilitee - SARL), Italy (societa responsabilita limitata - SRL), Belgium (private limited liability company), Luxemburg (limited liability company), Portugal (share society). Private company and closed corporation exist in British/American system. Moreover, private limited liability companies can be set up in the USA (LLC)3.
According to a different view, US private companies are not analogous to limited liability companies4. China with their limited liability companies provide another example of a country that adheres to common law model5. This legal form is characterized by: 1. Predominance of dispositive norms;
1 This section was written by Elena Apevalova, RANEPA.
2 See here and below: Evgeny A. Sukhanov, Comparative corporate right, M. Statut, 2015, pp. 75-77.
3 See in detail: Corporate right. Edited by Irina. S. Shitkina. V.Wolters Khiver 2007, pp.577 - 581.
4 Evgeny. A. Sukhanov. Issues of codification of corporate and ownership right. - M. Statit, 2018, p.21.
5 See in detail: Corporate right. Topical issues of theory and practice. Edited by V.A. Belov - M. Urait, 2015, p. 95
2. Qualities typical for a union of persons and a union of capitals1;
3. A more facilitated process of establishment of these entities compared to shareholding companies;
4. Lower accounting requirements2.
Legal regulation of limited liability companies is indeed more dispositive than of shareholding and especially public companies, however, dispositivity level of this regulation is still an argumentative issue3.
Current law on limited liability companies operating in Russia was adopted in February 19984, that is twenty years ago. At present, there are over 3.5 million limited liability companies, i.e. % of 4.5 million registered legal entities5. Most of limited liability companies are small and medium-sized businesses.
6.5.2. Legal regulation of limited liability companies in Russia, stages of development and specific models
Russia's transition to market economy demanded new legal regulation of civil turnover and entrepreneurial activity. In 1994, the first part of Civil Code was adopted and it stipulated main provisions on legal entities as well as rules on limited liability companies adopted from Germany as mentioned above.
As from this time, one may speak about stage I (1994 - January 1998) in the development of legislation on limited liability companies known for providing platform for regulation of legal entities, including limited liability companies, as an organizational and legal form. It was determined that a limited liability company is a company established by one or several persons with authorized capital divided into shares defined per size by constituent documents.
Participants are not liable for its obligations and bear risk of losses associated with the activities of the company according to value of their contributions (Article 87 of the Civil Code of the Russian Federation). It was stated that another economic entity consisting of one person will not be a sole participant of this company (Section 2, Art. 88 of the Civil Code of the Russian Federation). This restriction is related to a dangerous
1 According to a different view, limited liability companies represent a union of capitals For details, see, for example, Evgeny A. Sukhanov, Opere citato, p.21
2 See details: Corporate right. Edited by Irina S. Shitkina. M. Wolters Khiver 2007, pp.577-581
3 See details: Corporate right. Topical issues of theory and practice. Edited by V.A. Belov - M. Urait, 2015,p.128-129.
4 Federal law No.14 of February 8, 1998 "On limited liability companies".
5 A number of scientific publications dedicated to the topic of legal regulation of limited liability companies: Stanislav D. Mogilevsky. Limited liability company. Legislation and practical implementation. M., 2010; Andrey A. Glushetsky. Public and private corporations. Specifics of shares turnover in the authorized capital of a limited liability company: legal and economic aspects. M. Statut, 2017; Andrey A. Glushetsky. Authorized capital: stereotypes and their overcoming. Economic analysis of corporate right standards; V.G.Borodkin "Civil-legal regulation of corporate agreement in Russian legislation: Monography-Justinform, 2017; A.G.Chreniavsky, D.A .Pashintsev, O.A. Ternovaya "International corporate right - Knorus M., 2019 and others.
situation when a group of legal entities may use the same person as sole participant controlling these legal entities and having no financial liability.
Firstly, it means to be responsible for obligations of a bankrupted legal entity caused by instructions of the founder and liability of the main company for obligations of the subsidiary.
According to Article 89 of the Civil Code of the Russian Federation, Agreement and Statutes present constituent documents. General meeting of shareholders will be the supreme governing body with its established competence (Article 91 of the Civil Code of the Russian Federation). Day-to-day management will be carried out by executive body, either collegial or individual. Executive body is accountable to general meeting of shareholders.
In addition, this law reflects on reorganization, liquidation of a company, transmission of a share in the authorized capital to another person and withdrawal of a participant from a company (Articles 92-94 of the Civil Code of the Russian Federation).
Moreover, Article 67 of the Civil Code secured the following rights and obligations of participants of the legal entity: to participate in management of activities, receive information about activities, participate in the distribution of profits; receive part of property remaining after settlements with creditors or its cost, etc. in case of liquidation. These duties include: investment and non- disclosure of confidential information about company's activities, etc., if they are provided for by its constituent documents.
According to Article 68, part 1 of the Civil Code of the Russian Federation, entities can be transformed into companies of a different type or production cooperatives by decision of the general meeting of participants.
Stage II: February 1998-2011, establishment of a system of standards on limited liability companies. In February 1998, Federal Law No.14 "On Limited Liability Companies" dated February 8, 1998 was adopted and consolidated the following standards:
- Subsidiaries and affiliates. A company shall be recognized as a subsidiary if another (principal) company has the ability to influence on decisions taken by this company due to its predominant equity holding or in accordance with the concluded agreement or otherwise. A company shall be recognized dependent if another (principal, participating) company has more than 20% of the authorized capital of the first company (Article 6 of the Federal Law "On Limited Liability Companies");
- withdraw regardless of consent of other participants;
- sell or otherwise award their share in the authorized capital of the company (Article 8, point 1 of the Federal Law "On Limited Liability Companies");
- introduce (terminate and restrict) additional rights for participants according to Statutes of this company (Article 8, point 2 of the Federal Law "On limited liability companies");
- contribute to the authorized capital of the company: monetary evaluation of in-kind contributions approved by unanimous decision of the general meeting;
- invite an independent assessor to evaluate contributions (Article 15 of the Federal Law "On Limited Liability Companies");
- sue for exclusion of a participant seriously violating his/her duties or rendering impossible or hampering company's activity due to his/her actions or inactions. Members possessing the least overall share of 10% of the authorized capital are entitled to have this right (Article 10 of the Federal Law "On Limited Liability Companies");
- increase authorized capital at the expense of the company's property, additional contributions of participants, deposits of third parties accepted by the company if not prohibited by Statutes (Article 17of the Federal Law "On Limited Liability Companies");
- reduce authorized capital in a format of reducing nominal value of all participants' shares and/or repaying shares owned by the company (Article 20 of the Federal Law "On Limited Liability Companies");
- claim participant's share in the authorized capital. On creditors' demand for a share or part of a share, this request will be fulfilled only as a result of a court decision if there is no sufficient means to cover debts of other participant's property (Article 25 of the Federal Law "On Limited Liability Companies");
- contribute to company assets. Participants have the duty to contribute to company assets if stipulated by Statutes or by decision of a general meeting (Article 27 of the Federal Law "On Limited Liability Companies");
- allocate profits among participants. Company has the right to make a quarterly, semiannual or annual decision on allocation of its net profit among participants (Article 28 of the Federal Law "On Limited Liability Companies");
- place bonds (Article 31 of the Federal Law "On Limited Liability Companies");
- regarding collegial executive body: It may be envisaged by Statutes, elected by general meeting (Article 41 of the Federal Law "On Limited Liability Companies");
- appeal decisions taken by governing bodies. Decision taken by general meeting violating law, legal acts of the Russian Federation, company's Statutes and rights of a participant who did not vote or voted against the contested decision, may be invalidated by the court (Article 43 of the Federal Law "On Limited Liability Companies". )
- liability of the Board of Directors, sole executive body and members of collegial executive body. All these bodies should act in good faith and reasonable in the company's interests when exercising their rights and duties. They are also liable for damages caused to company by their faulty actions and inactions, unless other grounds and amounts of liability are established by federal law (Article 44 of the Federal Law "On Limited Liability Companies");
- related-party transactions and major transactions (Articles 45, 46 of the Federal Law "On Limited Liability Companies"). Transactions proving interest of members of the Board of Directors, a sole or collegial executive body or of a member, who possesses
more than 20% of total number of votes together with affiliated persons, shall not be settled by company without consent of the general meeting.
A major transaction means a transaction or several interrelated transactions relevant to acquisition, alienation or possibility of alienation of a property by a company, directly or indirectly, with a value more than 25% of the property value unless the Statutes provides for a higher amount of a large transaction. Transactions settled in the ordinary course of business will not be considered major ones;
- auditing commission of the company. It will be elected by general meeting of participants for a period determined by Statutes (Article 47 of the Federal Law "On Limited Liability Companies");
- auditing procedures and public reporting (Article 48-49 of the Federal Law "On Limited Liability Companies");
- documents' storage (Article 50 of the Federal Law "On Limited Liability Companies");
The following principles were developed further:
- authorized capital and shares. (Article 14 of the Federal Law "On Limited Liability Companies");
- executive bodies: the highest body is the meeting of participants, the Board of Directors (supervisory board), the sole executive body (Article 32 of the Federal Law "On Limited Liability Companies");
- standards on general meeting of participants (Articles 33-39 of the Federal Law "On Limited Liability Companies";
- standards on reorganization and liquidation (Articles 51-58 of the Federal Law "On Limited Liability Companies").
As a result, a model of a limited liability company was established and characterized by:
1. Low authorized capital, i.e. Rb 10.000, slightly over 130 Euro;
2. Autonomy from their founder/founders with regard to activities and responsibility;
3. Separation of authorized capital into shares representing transferable complex of property and non-property rights, i.e. rights to take part in corporate organizations and in their management;
4. More complicated procedure of entry/withdrawal of founders compared to shareholding company;
5. Structure of executive bodies adopted from shareholding company.
Limited Liability Company is more attractive when participants are at the same time managers and there is no agency conflict or it is minimized. In this case, participants require much less of external additional management control compared to shareholding companies, i.e. external audit, registrar, state regulator. This will result in reduction of losses.
Innovations focused on exemption of strategic enterprises from legal terms were adopted in 2008-2011 (April 2008)1; powers of the Board of Directors which can be attributed to their competence by Statures, for example, definition of main activities, etc.) were significantly expanded, contract proving establishment of the company canceled as a constituent document, a list of issues requiring unanimous2 decisions and two-thirds3 majority approved, procedure of shares transmission to other participants clarified, procedure for concluding a pledge share detailed; a new chapter "Maintaining a list of a company members" introduced, wording of interested-party transactions clarified, duty of affiliated persons to notify the company in writing about their own shares confirmed, procedure for concluding major transactions clarified as well as the list of exemptions; procedure for mergers, acquisitions, transformations of companies, etc. clarified (December 2008)4.
Furthermore, the right to demand transfer of a share in the court was confirmed in July-August 20 095 if the party to the transaction wrongfully evades its notarization (Article 21 point 11 of the Federal Law "On Limited Liability Companies"); Article concerning appeal of decisions of company's executive bodies confirmed provision stating that "the court has the right to uphold the decision being appealed if the committed violations are not material and decision did not entail losses to the company or this participant or other adverse consequences" (Article 43 point 3 of the Federal Law "On Limited Liability Companies").
Moreover, provisions were added on company's responsibility to provide information, in particular, that a company has the responsibility to provide access to participants to their judicial acts on dispute related to the establishment of the company, management and participation, changes of the grounds or the subject of previously filed claim, etc.
In February 2010, procedure determining payment of a part of the distributed profit of the company was clarified6 and the period of payment should not exceed 60 days from the date of the decision taken on distribution of profits among participants (Article 28 point 2 of the Federal Law "On Limited Liability Companies").
1 Federal law No. 58 of April 29, 2008 "On amendments to certain legal acts of the Russian Federation and invalidity of certain provisions of legal acts of the Russian Federation as a result of approval of Federal law on international investment in business companies strategically important for defense and security of the state".
2 This decision on establishment of a company, approval of its Statues, approval of its monetary evaluation of securities, other matters or property rights or different ones having monetary assessment of rights contributed by founders to pay shares in authorized capital.
3 Decisions on election of executive bodies, establishment of a revision commission or election of a controller and approval of an auditor have to be made by two thirds of votes.
4 Federal law No. 312 of December 30, 2008 "On amendments to Part one ofthe Civil law ofthe Russian Federation and certain legal acts of the Russian Federation".
5 Federal law No. 205 of July 19, 2009 "On amendments to certain legal acts of the Russian Federation"
6 Federal law No. 409 of December 30, 2010 "On amendments to certain legal acts of the Russian Federation relevant to payment of dividends (distribution of profit)."
A participant who has not received his share of a distributed part of profits has the right to demand payment of the respective amount within three years. Statutes may suggest a longer period but not more than 5 years. Deadline set for the appeal will not be prolonged if missed. If a participant did not file such a demand due to violence or threat, it could be regarded as exception (Article 28 point 4of the Federal Law "On Limited Liability Companies").
In July 2011, rules were clarified with regard to reduction of authorized capital of the company1, in particular, company had the duty to report on this decision to a state organization maintaining registration of legal entities within 3 working days after the decision was taken and publish news in mass media twice a month. Requirements for publication of this news are stipulated in Article 20, points 3, 4 of the Federal Law "On Limited Liability Companies".
Then, the principles below were confirmed as follows:
- terms to claim early fulfillment of obligations for creditors, and/or when impossible, then, terminate it and pay damages 30 days from the date of publication of the last notice on reduction of authorized capital if creditor's claims arose before the notice was published;
- six month limitation of statutes from the date of the last publication on reduction of authorized capital;
- right of the court to refuse satisfaction of the above requirement, if the company proves that as a result of reduction of authorized capital rights of creditors were not violated and provided security was sufficient for proper implementation of duties (Article 20, point 6 of the Federal Law "On Limited Liability Company".
Furthermore, legislator settled the issues of funds and net assets of the company: the
cost of such assets except for credit organizations is determined according to accounting data2, for credit organizations it is the amount of own funds (assets)3. Company is obliged to provide access to information on the value of its net assets to any interested party. In addition, the company's annual report should contain information about the size of the company's net assets4.
1 Federal law No. 228 of July 18, 2011 "On amendments to certain legal acts of the Russian Federation relevant to reviewing methods of protection of creditors' rights under reduction of authorized capital, change of requirements to business companies in case authorized capital does not correspond to cost of net assets".
2 Executive order of the Ministry of finances of Russia No. 84n of August 28, 2014 (edited on February 21, 2018) "On adoption of procedure to define cost of net assets".
3 Instruction of the Bank of Russia No. 2332-Y of November 12, 2009 (edited on June 2, 2016) "On register, forms and procedure of formulation and presentation of accounting forms of credit organizations to Central Bank of the Russian Federation".
4 Annual report should include:
1) parameters characterizing dynamics of changes of the cost of net assets and authorized capital in the three last completed financial years, including accounting year or every completed financial year if the company exists less than three years;
In the event of reduction of net assets versus authorized capital, the company is obliged to decide on reduction of the authorized capital or on liquidation of the company not later than six months.
Stage III. 2012 until present. The reform of civil legislation introduced systemic changes and formulated fundamental legal standards in the sphere of legal entities' activities aimed at further development of corporate governance standards by changing requirements on reorganization and liquidation of enterprises, introduction of standards on corporate agreements, rights and obligations of companies. The most significant changes concerned the following topics:
a) introduction of a concept of corporate relations associated with participation in corporate organizations or their management;
b) provision of corporate rights as a compulsory condition for activity of a legal entity;
c) introduction of a system based on legal forms of legal entities1.
Legal entities will be divided into corporate, i.e. those where founders (participants) have the right to participate/be a member and define their supreme body, and unitary entities where founders will not become participants and acquire membership.
Corporate legal entities include business partnerships and societies, agricultural (farmers) households, economic partnerships, production and consumer cooperatives, public organizations, associations (unions), real estate owners associations, Cossack communities entered into relevant register, and small indigenous communities.
According to few authors2, revision of standards on legal entities was driven basically by the necessity to simplify and unify legal regulation, eliminate multiple current laws and their mutual contradictions and enhance the role of the Civil Code in regulating status of legal entities.
d) facilitation of constituent documents of legal entities. All legal entities except business ones must act only in compliance with Statutes approved by founders (participants) while for business companies this will be a constituent agreement of association. It is possible to use standard Statutes approved by relevant government body. Founders have the right to approve internal regulations governing corporate documents.
2) results of analysis of reasons and factors which led to lesser cost of net assets than of authorized capital according to opinion of a single executive body of the company, board of directors (if this board of directors stablished in the company);
3) list of measures assuring compliance of the cost of net assets with the size of authorized capital (Article 30 point 3 of the Federal law "On limited liability companies"
1 In May 2014, Federal law No.99 of May 5, 2014 "On amendments to chapter four of Part one of the Civil code of the Russian Federation and invalidity of certain provisions of legal acts of the Russian Federation".
2 Tatiana V. Soifer. Modern trends of development of civil legislation on non-commercial organizations. - //Rossiiskaya - yustitsiya, 2014, No.3, p.8. Codification of Russian private law 2015 (edited by Pavel Krasheninnikov).- Statut, 2015.
e) members of collegial bodies of a legal entity take the responsibility to act in their interests, in good faith and reasonably, i.e. the same way as a person authorized to act on behalf of a legal entity. Principle of good faith practically means that mentioned participants of civil turnover must respect rights and interests of the counterparty, avoid abusing their rights, misusing own rights, taking actions aimed at "circumventing" the law and deliberately creating conditions for non-fulfillment of obligations or unjust acquisition of rights. Civil law cannot prescribe and prohibit any possible violations of someone's interest in practice, that is why it is important for courts to have the opportunity to recognize those or other persons dishonest and their actions to be abuse of the right.
Moreover, in our opinion, introduction of this principle brings this legal system closer to common law using the opportunity to take a decision based on general principles rather and specific norms.
f) confirmation of responsibility of the person authorized to speak on their behalf as well as members of collegial bodies of legal entities (with the exception of those who voted against the decision that caused losses or, acting in good faith, did not vote). The above-mentioned persons will be obliged to compensate damages caused to legal entity as a result of their fault at the request of legal entity and/or its founders (participants). Joint and several liability is envisaged if there are joint losses. Agreements to limit or eliminate such liability are void. In fact, a mechanism introduced to protect interests of the owner from abuses of management, which is a common practice in Russia. Practice of dealing with issues of recovery of losses from members of the board of directors has not yet developed;
g) a significant change of reorganization standards of legal entities - the possibility of a comprehensive reorganization of legal entities has been introduced, i.e. reorganization of a legal entity with a simultaneous combination of various forms of reorganization as well as reorganization involving more than two legal entities, including those belonging to different organizational and legal forms. It seems that these expanded abilities of reorganization will make it difficult to ascertain legal succession and contribute to the abuse by reorganized enterprises;
h) introduction of the concept "non-operating legal entity", which is a legal entity that for 12 months did not submit reporting documents provided for by the legislation on taxes and fees and did not carry out transactions at least at one bank account. Such an entity will be considered to have actually terminated its activities and subject to exclusion from the unified state register of legal entities, which does not prevent members of its governing bodies, individuals determining its actions from taking responsibility. Introduction of these procedures is considered positive, and will contribute to "clear" the market from abandoned companies and one-day firms;
i) introduction of general provisions on participants' rights and duties. It largely repeats the existing rules on rights and duties of legal entities. The new provisions are the following: to participate in corporate decisions required to continue corporation's activity, if their participation is critical for making such a decision, as well as duty to
avoid taking actions to the detriment of the corporation interests. It is important to secure the following rights:
- demand remuneration of losses caused to the corporation acting on their behalf;
- challenge transactions settled by the corporation and demand application of consequences of invalidity of void transactions.
Law and constituent document of a corporation may include other rights and obligations for its participants.
Members of the corporation collegial executive body have rights to receive information about corporation's activities, get acquainted with accounting and other documentation, claim compensation for corporation's losses, challenge transactions settled by corporation and claim application of consequences of invalidity of null and void transaction;
j) option to redistribute powers of participants disproportionately to their shares in the authorized capital is a new approach to regulation of activities of non-public business companies. This option can be realized when included in the Statutes or in a corporate agreement subject to introduction of this information into the Unified State Register of Legal Entities.
Thus, a new mechanism capable to change the distribution of forces in corporate governance was presented to participants of limited liability companies. Having mutually agreed, participants have the possibility to implement other regulation different from law on regulation;
k) general provisions on the authorized capital of the economic company were also developed. Only cash means have to contribute to authorized capital. Monetary assessment of in-kind contributions to the authorized capital should be implemented by an independent appraiser. Participants of the economic company were forbidden to determine monetary value of in-kind contributions above the value determined by the appraiser;
l) solidarity subsidiary liability of participants and independent appraiser determined in case company's property is insufficient when paying shares by non-monetary funds in the amount equal to overestimated evaluation of property contributed to authorized capital within 5 years from registration of the company and/or making relevant changes to Statutes. Such responsibility does not apply to companies set up in the process of privatization through privatization of unitary enterprises.
In 2012-2018, more stringent requirements for a number of transactions, i.e. notarial form, were introduced to the Federal law "On Limited Liability Companies" and notary has the right to make sure that alienated shares have been fully paid. Substantial changes pertained to articles on interested party transactions and major transactions. Interested party transactions are no longer required.
A different procedure for approval of interested-party transactions or instruction on non- application of interest standards can be established by the company Statutes. Only those transactions that go beyond the ordinary course of business are considered major transactions. New rules on option plan were introduced.
In 2014, a concept of a standard Statutes of limited liability companies was introduced in Article 52 of the Civil Code of the Russian Federation. Today there are 36 of them1. A real opportunity to choose a standard OOO Statutes will come into force only after June 25, 20192.
In 2016, Federal Notarial Chamber received an opportunity to maintain and store the list of participants included in the register of lists of participants of limited liability companies under unique information notarial system. The deadline for liquidation was reduced to one year. It was stipulated that the company's Statutes may provide for the need to obtain the consent of the board of directors or the general meeting to conduct certain transactions.
Existing law "On Limited Liability Companies" is twenty years old and the selected German model is characterized by the following principles:
- relatively low authorized capital, i.e. Rb 10.000, slightly more than130 Euro;
- company act and take responsibility independently from their founder/founders;
- authorized capital is divided into shares representing a complex of property and non-property rights, i.e. rights to take part in corporate organizations and their management;
- more complicated procedure of entry/withdrawal of founders compared to shareholding company;
- structure of LLC executive bodies adopted from shareholding company.
- predominance of dispositive standards in the legal regulation of limited liability companies;
- existing model of limited liability companies possess features of a union of persons and capital;
- lower accounting requirements for limited liability companies.
6.5.3. On certain issues of regulation of the limited liability companies
First of all, let us focus on corporate agreements. The first corporate agreements appeared in Russia nearly in the 90-s when participants of Russian economic companies wanted to bring out corporate agreements from Russian regulation3.
1 Presentation by Irina S. Shitkina at the Gaidar forum 2019 on January 17, 2019-http://gaidarforum.ru/about/mediamaterials/video17-yanvary-2019/
2 Standard OOO Statutes in 2018- https://www.regberry.ru/registraciya-ooo/tipovoy-ustav-ooo-v-2017-godu.
3 Corporate agreements were brought out from Russian regulation owing to such standard schemes as: 1) establishment of a holding structure with a conclusion of shareholders agreement on international right with regard to company switched under international jurisdiction; 2) application of international right directly to the agreement when establishment of a holding structure not possible. D.E. Lovyrev. Legal specifics of corporate agreements//Text of the presentation at the conference " Practice of implementation of shareholders agreement and responsibility issues of executive bodies, shareholders and participants of shareholding companies and limited liability companies" URL: http://www.mzs.ru/upload/iblock/434/434a72b108ab8584352722a2c0c37607.pdf
In 2006, decisions taken on specific issues of ZAO "Russian Standard Insurance" and OAO "Megafon" stated that principles of shareholders' agreements were recognized invalid as legislation lacked any detailed rule governing regulation of such agreements. However, courts did not investigate each individual principle of the agreement for its compliance with nature of corporate relations and obligations self-imposed by the parties1.
Issues related to application of international law with regard to corporate agreements failed practical resolution for long enough. The reason was that corporate agreements "are at the junction of two areas of private law", which are characterized by opposing approaches at the level of private international law. It is a fact that principle of autonomy of the parties dominates in the area of contractual duties with parties having the opportunity to choose the law applicable to the contract (Article 1210 of the Civil Code of the Russian Federation).
On the opposite, corporate right represents an area of practically inseparable and imperative supremacy of private law of a legal entity understood as its right according to its place of state registration (Article 1202, point 1 of the Civil Code of the Russian Federation)2..
Later, in December 20083 legislator adjusted separately agreements on rights of participants of an economic company and shareholding agreements in June 20094. Adopted standards did not provide for a system and raised many questions among practitioners and theorists.
When Federal Law No.260 "On Amendments to Part Three of the Civil Code of the Russian Federation" of September 30, 2013 was adopted, it stated that parties to a corporate agreement including a foreign element have the right to subordinate its contract to an international law according Article 1214 of the Civil Code of the Russian Federation, however, obligatory taking into consideration imperative standards of a country where this legal entity was established and that is contracted.
Further development of standards on corporate agreements took place along with the reform of civil law, when, as of September 1, 20145, general provisions on a corporate agreement were enshrined (Article 67.2 of the Civil Code). Thus, participants of the economic company or some of them are entitled to conclude an agreement among themselves on exercising their corporate (membership) rights (corporate agreement).
1 See details: V.G. Borodkin. Civil/legal regulation of corporate agreement in the Russian legislation: Monography. D.I.Stepanov. New provisions of Civil code on legal entities//Law 2014. N7.C.-Justinform 2017, pp. 14-15
2 See details: V.G. Borodkin. Civil/legal regulation of corporate agreement in the Russian legislation: Monography. - Jusinform 2017, p.19
3 Federal law No.312 of December 30, 2008 (edited on May 5, 2014) "O amendments to part one of the Civil code of the Russian Federation and certain legal acts of the Russian Federation"
4 Federal law No.115 of June 3, 2009 (edited on June 29, 2015) "O amendments to Federal law "On shareholding companies" and Article 30 of the Federal law "On the market of securities".
5 Federal law No.99 of May 5, 2014 "On amendments to chapter four of Part one of the Civil code of the Russian Federation and invalidity of certain provisions of legal acts of the Russian Federation".
Participants are obliged to implement these rights somehow according to the agreement or abstain from their implementation, i.e.to vote in a certain manner at the general meeting, fulfil other coordinated managerial acts, purchase or alienate shares in its authorized capital under specific circumstances or abstain from alienation of shares under specific circumstance.
A corporate agreement will not oblige its participants to vote in accordance with the instructions of executive bodies, determine structure of executive bodies and their competence. The terms of a corporate agreement that contradict the above rules are void.
Prior to adoption of changes to the Civil Code, the scope of powers of participants in the economic company was determined solely in proportion to their shares in the company's authorized capital. A corporate agreement may provide for a different amount of powers. A prerequisite is to include information on availability of such an agreement and on the scope of competence of the company's participants provided for in the unified state register of legal entities (Article 66, point 1, para 2 of the Civil Code of the Russian Federation). This can change influence and balance of power in corporate decisions, amount of dividends, etc.
Corporate agreement may include an obligation to vote at the general meeting of participants for provisions defining structure of executive bodies and their competence, to be included in the Statutes if, in accordance with the Civil Code and laws on business companies it is allowed to apply Statutes in order to change structure of executive bodies of the company and their competence.
Participants of business partnership having concluded a corporate agreement must notify the company about the fact of conclusion of a corporate agreement and its content does not have to be disclosed. When this obligation is not fulfilled, participants not being parties to the corporate agreement are entitled to claim compensation for their losses.
Unless otherwise provided by law, information on the content of a corporate agreement concluded by participants of a non-public company shall not be subject to disclosure and considered confidential.
Creditors and other third parties may also conclude an agreement with participants of economic company which obliges participants to exercise somehow their corporate rights in order to ensure legally protected interest of such third parties or refrain (refuse) from their implementation, i.e. vote in a specific manner at the general meeting, carry out other coordinated managerial actions, acquire or alienate shares of its authorized capital according to a special cost or refrain from alienation of shares prior to establishment of special circumstances. Rules on corporate agreement relevantly apply to this agreement.
Opposite from Russian law, corporate contract (agreement) is known for over a century for its developed international law enforcement, being part of common as well as continental law. At the same time, judicial and doctrinal recognition of such agreements did not happen at once. Corporate agreements were questioned for extended
period in law enforcement and science. However, at present, corporate agreements are recognized as an integral part of regulations governing relations between participants under international doctrine and judicial acts1.
There are two principal positions with regard to the limits of the subject of a corporate agreement for participants of economic companies. The first one confirms unlimited subject of such an agreement relevant to management and activities of this company. This approach is typical for Great Britain and USA2. Practice of corporate agreements in closed corporations is most developed in the USA with specified agreements between participants of corporation and agreements with members of the Board of Directors. The latter are traditionally focused on certain curtailment of freedom to take decisions by members of the Board of Directors.
In England, a corporate contract may contain corporate governance, financial, accounting issues, procedure for transmission of company's shares and others matters regulating relations of the parties with regard to specific circumstances which may include conditions for exercising rights to demand sales of company's shares due to insolvency of the other party, substantial violation of its contractual obligations as well as changes in the composition of shareholders or indirect owners of a party to a contract in the event of "change of control" situation. Such an extensive regulation is associated with a long tradition of common law system.
The second position means that the subject of a corporate contract is limited to issues related to procedures for exercising corporate rights by shareholders and this is typical for Western Europe and Russia. If Europe has experience in concluding corporate contracts, the, most often there is no relevant legislation. Where it exists, for example, in Italy, there are only two articles dedicated to a corporate contract, included in the legislation in 2003 and containing strictly imperative rules on such contracts.
Civil Law of Italy titles them accompanying corporate legal contracts with mainly historical background. These contracts should not contradict illegal imperative norms and their subject is very limited, i.e.: exercise of voting rights in a shareholding company or in its parent company; restrictions on transmission of shares or participation in such companies; mutual control over subsidiaries, however, period of their validity is limited to 5 years (Art. 2341-bis Civil Code). In public companies, such contracts have to be publicly announced at general meetings and their contents recorded in the minutes of the meeting and in the commercial register (Art. 231 -ter CC).
Corporate contracts were mostly expanded in Switzerland and after a series of doubts, nevertheless, it allowed an option to conclude mutual contracts relevant not only to
1 V.G. Borodkin. Civil/legal regulation of corporate agreement in the Russian legislation: Monography.-Jusinform 2017, p.4
2 Here and below: D.V. Dobrachev. Topical issues of judicial practice in corporate and entrepreneurial right.-M. Infotropic Media, 2018
coordinated voting but also to preliminary or preferential purchase of shares exclusively between participants of small (private, non- public) shareholding companies, impose certain additional obligations on shareholders (refraining from mutual competition, not disclosing certain information) or grant them additional rights (to receive information and even participate in decision making), treating them as contracts of shareholders' rights but firmly stating their obligation-legal nature, which, therefore, does not affect the relationship between a party to such contract and shareholding company as a whole.
Such a contract does not provide participants with additional corporate rights, it is not a constituent document or an annex to company's statutes. If regulation of the contract on the implementation of participants' rights in an economic society is an essential stage of development for Russian legislation, recognition of such contracts by courts is a long historical tradition in English law.
These norms are stipulated in the Russian civil law while in English law legal norms relevant to these contracts are primarily expressed under existing precedent law. According to several authors1, extension of scope of a corporate contract may serve as a platform for abuse due to legal opportunity to output corporate governance beyond governing bodies of a business entity.
Significant mitigation of responsibility at all levels of corporate relations, including the responsibility of corporations and individuals determining their activities to creditors, i.e. other participants of civil circulation may lead to adoption of such norms. A company could become dependent not only on company's participants but also on third parties who take part in shaping the terms of a specific corporate agreement2.
According to a different view, a corporate contract contains such a regulation of their relations, which corresponds to their goals of participation in corporate management. Last but not the least, parties received a real opportunity to protect their rights in case of violation of a corporate contract by one or several signatories3.
Limited liability companies face another significant issue, that is, the insecurity of creditors' rights. In order to ensure debtor's economic responsibility, creditors' interests have to be protected. In continental law, it happens at the expense of large authorized capital. In common law, authorized capital is minimal or does not exist and therefore protection of creditors' interests is carried out by means of a follow-up control (ex post).
Mandatory inspection of actual property status plays critical role in this system in order to prevent insolvency resulted from "redistribution of property". Directors should organize such an inspection using "solvency test." In order to increase protection of
1 See details: Evgeny A. Sukhanov. Comparative corporate right.-M. Statut, 2015
2 Decision of the Council on codification and improvement of civil legislation under the President of the Russian Federation of August 1, 2011, Protocol No.98. Civil Law Review Journal, 2011 No.5
3 See D.I. Stepanov. New provisions of the Civil code on legal entities//Law 2014. N7.C.37
creditors, common corporate law strengthen personal subsidiary liability of directors and tighten rules on bankruptcy.
What is the situation in Russia? On one hand, the European (German) model of solid capital is used as a basis. On the other hand, the size of the authorized capital is pure symbolic (in Germany, for comparison, it accounts for 25.000 Euro), i.e. it does not protect interests of the creditors. At the same time, there is no follow-up system of monitoring, typical for British/American legal system. This leads to both the insecurity of creditors' rights and conditions for emergence of fictitious companies.
It seems that legislator should gradually increase the size of the authorized capital. At the same time, members of limited liability companies should have an opportunity to switch to individual entrepreneurship.
What are the prospects? The model of legal regulation of limited liability companies was shaped and its characteristics discussed above in details. German model served as a basis. It took twenty years to develop the foundation and key provisions relevant to activities of limited liability companies.
Nowadays, a trend focused on a higher specificity of legislation relevant to limited liability companies, regulation of acute issues, frequently used gaps and resolution of existing contradictions dominates in legal practice. Definition of the most important principles to be followed shall be an alternative in legal practice, which is typical for common law with its traditionally strong "judicial" law. Although it is possible to point out the convergence of continental and common law as a tendency, such emphasis on "judicial" law is not yet possible.
Norms adopted under reform of the civil law (2012-2018) present to a certain extent a compromise between continental and common law systems in terms of regulation of business societies, in particular, size of the authorized capital and corporate contracts mentioned above. In this regard, it is extremely important to secure balanced interests of shareholders of limited liability companies and of other interested parties including creditors and the state.
As for development of corporate legislation1 in relation to limited liability companies, the following trends are topical inter alia: compliance (harmonization) of federal laws on business companies with the Civil Code of the Russian Federation, dispositive regulation of priority right of shareholders of a limited liability company to the acquisition of shares sold to third parties, amendment of rules on foreclosure of shares in a limited liability company in terms of determining value of shares in order to ensure effective protection of interests of creditors pledgees and acquirers of shares by tenders, invention of a mechanism for simultaneous recording of transmission of shares in several business entities, reduction of excessive requirements to business companies in terms of disclosure (provision) of information.
1 See: URL: http://static.government.ru/media/files/ne0vGNJUk9SQjlGNNsXlX2d2CpCho9qS.pdf/
6.6. Government support of small and medium sized entrepreneurship in Russia1
Support of the small and medium sized entrepreneurship (SME) sector is recognized to be one of Russia's economic policy priorities2,3. It is customary to speak of that sector's low level of development compared with other countries. However, when comparable estimates are applied, the gap does not appear to be catastrophic. The relative share of SMEs in the value added produced by Russia's business sector amounts to about 44 percent, in the developed countries - OECD member states it amounts on average to 55 percent, in the USA - to 48 percent, and in Canada - to 30 percent. The problems faced by Russian SMEs, in qualitative terms, are as follows: the percentage of exporters and technological startups is low, and a greater part of that sector is unregulated; in 2018, the relative share of medium sized firms and the number of technological startups shrank even further.
The conditions for and specific features of the SME sector's development vary across Russia's regions, and this fact is completely overlooked by prevailing legislation. According to our estimations, entrepreneurial activity in the regions does not depend on government support, instead responding to macroeconomic and institutional changes. In 2018, in a majority of Russian regions, the number of SME subjects and their turnover declined in response to shrinking personal income, especially in the regions with a high relative share taken up by the shadow sector, while the same indices increased in those regions that hosted the FIFA World Cup events.
According to the results of business surveys, 91 percent of firms have never relied on government support instruments. Direct federal support measures may create wrong incentives for SMEs and obstacles to the elaboration of adequate policies in regions and municipalities. For example, tax exemptions and an access to government purchases encourage firms to artificially split up, while government support equalization for all the regions and cuts on subsidies do not create any stimuli for local authorities to engage in a more systemic interaction with small businesses. Direct support measures target only a negligible number of SME subjects (less than 3 percent).
The goals set by the SME Development Strategy and the Presidential Executive Order, in view of the current macroeconomic situation and institutional conditions, can be achieved only at the formal level. Previously, entrepreneurial policies were very often elaborated inconsistently, with no regard for the regional and other specificities of SMEs, and statistics were controversial. However, no qualitative development can be
1 This section was written by V. Barinova, Gaidar Institute, RANEPA, RFTA; S. Zemtsov, Gaidar Institute, RANEPA, RFTA; Yu. Tsareva, RANEPA, RFTA.
2 RF Government Directive No 1083-r dated June 2, 2016 'On Strategy of Small and Medium-sized Business Development in the Russian Federation for the Period until 2030' // Government of the Russian Federation. 2016. URL: http://government.ru/docs/23354/
3 Executive Order of the President of the Russian Federation No 204 dated May 7, 2018 'On National Goals and Strategic Objectives of the Russian Federation through to 2024'. 2018. URL: http://www.kremlin.ru/acts/bank/43027
possible in the SME sector without correct and statistically substantiated targets. From 2017 onwards, direct support measures (subsidies, loans, government purchases) have been prevailing. There could be an alternative approach, i.e. the creation in the regions of local development institutions for SMEs, a professional investor pool, a specialized private and non-profit infrastructure, and support of entrepreneurial networks (in cooperation with consultants and local authorities).
6.6.1. The main development trends in Russia's SMB sector in 2017-2018
The main indicator of development in the SME sector is the role it plays in the national economy. According to official data released by Rosstat and the RF Ministry of Economic Development, the relative share of the SME sector in GDP increased from 21.6 percent in 2016 to 21.9 percent in 2017 (18.5 percent in 2012) (Fig. 22), while by the number of persons employed, it increased from 26.3 percent in 2017 to 26.5 percent in 2018.
Fig. 22. The movement pattern of the GDP share of gross value added of SME subjects over the period 2011-2017, percent1
Source: Rosstat; RF Ministry of Economic Development.
Table 29 shows the main characteristics of the SME sector and their movement patterns in 2018. The number of SMEs in 2017-2018 increased only slightly - by 2.4 percent, or by 138,700. The highest growth rates in the SME sector were observed in several big regions that hosted the FIFA World Cup events2. This happened due to the increased number of firms operating in the services sector (trade, catering, lease of
1 According to Rosstat, it is not correct to compare available data for 2015-2016 as a time series, because the criteria for attributing economic subjects to the category of SME were altered in 2016.
2 For further details, see RBC at https://pro.rbc.ru/news/5c21e5a49a7947148c93660f
housing accommodations, entertainment). Overall across the 13 regions hosting those events, growth over the period from mid-2017 through mid-2018 was twice the regional average (3 percent), thus accounting for about 95 percent of the total number of new firms. In particular, the number of small and medium sized enterprises jumped as follows: in Moscow by 4.6 percent, in St. Petersburg by 3.6 percent, in Samara Oblast by 3.6 percent, in Leningrad Oblast by 5.6 percent, and in Moscow Oblast by 3.3 percent. During that period, the number of SMEs was shrinking at the fastest rates in several regions of the North Caucasian Federal Okrug (NCFO), most probably as a result of many small firms having shifted into the shadow sector. The decline in the Far Eastern Federal Okrug was 0.68 percent, and in the Arctic zone of the Russian Federation - 2.1 percent. In the northern regions, the negative factor could be the requirement to switch over to online cashier registers, which pushed firms to the unregulated business sector, because the businesses operating in remote settlements were unable to comply with the established rules, for financial and technological reasons, and also for lack of reliable Internet access.
Table 29
The main characteristics of the SME sector in 2016-2018
Individual entrepreneurs Micro companies Small companies Medium sized companies SME subjects, total
Data as of November 10, 2017
The number of SMEs, units 3,105,636 2,498,152 238,893 19,679 5,862,360
Average staffing number, thousands of persons 5,418.8 5,452.4 6,290.7 1,904.7 19,066.6
Average staffing number per enterprise, persons 1.7 2.2 26.3 96.8 3.3
Output of goods and services, billions of rubles 761 1,665 909 262 3,597
Productivity, millions of rubles per person 0.1 0.3 0.1 0.1 0.2
Structure of indices by enterprise size in 2017, percent
Number of SMEs 52.98 42.61 4.08 0.34 100.00
Average staffing number 28.42 28.60 32.99 9.99 100.00
Output of goods and services 21.16 46.29 25.27 7.28 100.00
Data as of November 10, 2018
Number of SMEs, units 3,316 472 2,441 283 224,741 18,595 6,001,091
Average staffing number, thousands of persons 5,771.3 5,885.1 5,820.9 1,787.2 19,264.4
Average staffing number per enterprise, persons 1.7 2.4 25.9 96.1 3.2
Output of goods and services, billions of rubles 1,105 2,369 895 271 4, 640
Productivity, millions of rubles per person 0.19 0.4 0.15 0.15 0.24
Structure of indices by enterprise size in 2018, percent
Number of enterprises 55.3 40.7 3.7 0.3 100.00
Average staffing number 30.0 30.5 30.2 9.3 100.00
Output of goods and services 23.8 51.1 19.3 5.8 100.00
Source: Unified Register of Subjects of Small and Medium Sized Entrepreneurship. URL: https://ofd.nalog.ru.
Nationwide in 2018, the number of medium sized firms (those with the highest competitive capacity) declined by 5.5 percent, and their relative share in the SME sector shrank by nearly 12 percent. The number of legal entities operating in the SME sector declined over the course of 2018 by 72,000 units, while that of individual entrepreneurs (IEs) increased by 210,800. Some of them could emerge in connection with the FIFA World Cup events, thus moving away from the shadow sector (or from the self-employed category).
The number of persons employed in the sector increased only slightly from 19.07 million to 19.26 million, or approximately by 1 percent, this growth occurring in the main due to IEs and micro companies, while at the same time that index declined for small and medium sized businesses. Accordingly, the average number of employees per enterprise declined, while in the category of micro companies the same index soared by 9 percent.
Labor productivity increased, but perhaps this happened as a result of better data reporting in response to tougher control enforced by the Federal Tax Service (FTS), and not an increased output of goods and services in real terms.
In mid-2018, the national average entrepreneurial activity index (the ratio of the number of SMEs to staffing number) slightly increased relative to mid-2017 (by 1.4 percent). Its highest growth rates were observed in the regions situated near the cities that hosted the FIFA World Cup events: in Leningrad Oblast, the territories close to the city of St. Petersburg (7.57 percent); in the Republic of Mari El, the territories close to the cities of Kazan and Nizhny Novgorod (7.45 percent); in Samara Oblast (5.54 percent); and in the territories close to the city of Moscow. This phenomenon may be indicative of a notable proliferation of small businesses in the cities and regions surrounding the biggest agglomerations after the surge of economic activity in response to the FIFA World Cup.
In spite of expectations of economic growth, the turnover of small firms in H1 2018 increased only slightly relative to H1 2017 - by a mere 0.51 percent; in the North Caucasus Federal Okrug it dropped by 12.3 percent, and in the Arctic zone - by 0.04 percent. In the regions involved in the FIFA World Cup event, the turnover index increased somewhat higher than the national average - by 0.67 percent, but still remained below the CPI growth rate. The highest effects of the FIFA World Cup can be seen in the Republic of Tatarstan (growth by 31.3 percent), Moscow Oblast (19.7 percent), Leningrad Oblast (8.4 percent), Rostov Oblast (6.2 percent), Kaliningrad Oblast (6 percent), and the Republic of Mordovia (2.85 percent). The relative shares of companies in the total turnover of small enterprises across Russia providing designer services, comprehensive servicing of business premises, telephone call processing, waste disposal, land development, gambling, and B&B services all doubled. All these types of business activity have to do with hosting a football tournament.
According to data released by Rosstat, the number of small and medium sized exporting companies increased significantly - from 30,000 to 47,000, or by 57.4 percent1. The relative share of exporters in the total number of small and medium sized enterprises jumped from 11.6 to 19.5 percent, but their relative share in the total number of SMEs increased less impressively - only from 1.1 to 1.8 percent; for reference: in Germany - 32 percent, in the USA - 21.2 percent, in Poland - 14.6 percent. The aforesaid positive movement pattern may be an upshot of the ongoing measures designed to promote the development of regional export centers, but it also may have
1 The number of small and medium sized enterprises contributing to exports // Rosstat. 2018. URL: gks.ru/metod/pred-export.xlsx
been contributed to by the Russian ruble's weakening relative to foreign currencies and the domestic market shrinkage (due to plunging personal income). Another possible cause is the increased exports of services during the FIFA World Cup.
Overall in 2018, the structure of the SME sector demonstrated negative dynamics: the number of small and medium sized enterprises dropped, that of IEs increased, and the relative share of small and medium sized firms in the production of goods and services declined. These changes may have had to do with the desire of businesses to reduce their costs through splitting up and claiming tax exemptions1, or their moving into the shadow sector.
According to a variety of estimations, the role of the shadow economy in Russia is quite prominent: over the course of last year, about 44.8 percent of the total number of persons employed in 2017 at least once were hired in violation of the Labor Code of the Russian Federation or were paid 'under the counter' ('in an envelope'), and 31.4 percent of them do this on a regular basis2. According to Rosstafs estimations (Fig. 23), the relative share of the unregulated economy increased significantly from 16.4 percent in 2010 to 19.8 percent in 2017, while the number of persons employed in the 'informal' sector jumped from 12.6 million in 2006 to 19.8 million in 2017. Meanwhile, the informal employment structure demonstrated an increase in the number of persons employed in the 'informal' sector only from 85.7 percent in 2006 to 93.4 percent in 2017.
18 16 14 12 10 8 6 4 2 0
■ 1 Number of self-employed persons and similar categories, million i i Number of persons employed in individual entrepreneurship sector, million Share of informal sector in total number of employed persons, percent
Fig. 23. The number and relative share of persons employed in the informal sector from 2010 through 2017
Source: Workforce, employment and unemployment in Russia. URL: http://www.gks.ru/wps/wcm/ connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_1139918584312
1 The experiment aiming at legalization of self-employed individuals may also result in a reduced number of individual entrepreneurs, because the latter will be registered in the self-employed category.
2 Research Center for Politico-Social Monitoring, RANEPA School of Public Policy.
The by-industry structure of the SME sector is similar to that observed in the OECD member states, where a significant share of SMEs is likewise taken up by trade and services. The lower number of SMEs operating in manufacturing industries in Russia can be in part explained by this country's specialization in the context of global trade. There is a deficit of industrial fast-growing firms1; thus, for example, in the RBC's ranking of fast-growing companies for 2017, the majority of successful companies operated in the trade and services sector2.
Russia differs from foreign countries in that the number of innovative startups here is small relative to the total population. For example, in December 2018, the RF Ministry of Education and Science's database included only 2,890 small innovative enterprises set up by higher educational establishments3. Over the course of 2017, just under 15,000 new firms with non-zero proceeds were established in the hi-tech sector of the economy4, which is 11 percent less than in 2016. The characteristic feature of technological startups is their high concentration in the cities of Moscow and St. Petersburg and in Moscow Oblast, where approximately 40 percent of their total number are situated. Meanwhile, the number of startups supported by the Foundation for Assistance to Small Innovative Enterprises (FASIE) (the START and UMNIK Programs) shrank, in 2017, by 43 percent from 3,439 to 1,967. As a result, the relative share of startups receiving the Foundation's support in the total number of hi-tech startups shrank from 23 to 13 percent. The volume of funding allocated by the Foundation to all its programs likewise declined, from RUB 6.5 billion to 5.2 billion. However, both the funding volume and the number of projects may increase in the framework of the National Technology Initiative (NTI) in connection with the National Project's implementation.
6.6.2. The system of government support of SMEs in Russia
It took more than a decade to build the existing system of government support measures targeting SMEs in Russia, but prior to 2015 its activity was mostly reduced to allocating subsidies and granting tax exemptions. A new comprehensive package of measures was adopted after the Russian Federation State Council's meeting in
1 Zemtsov S. P., Maskaev A. F. Fast-growing firms in Russia: characteristics and growth factors // Innovations, 2018. No 6, P. 67-75.
2 RBC // RBC Ranking: 50 Fastest-growing companies in Russia. 2018. URL: https://www.rbc.ru/magazine/2018/12/5bf2eac39a7947ec0fd1785f)
3 Records and monitoring of small innovative enterprises in the science and education sphere // Register of notifications concerning the creation of economic societies and economic partnerships. 2018. URL: https://mip.extech.ru/docs/reestr_3_2018.pdf
4 Adamaytis S. A, Barinova V. A, Zemtsov S. P, Kidyaeva V. M, Kotsyubinsky V. A, Semenova R. I, Fedotov I. V., Tsareva Yu. V. National Report 'High-tech business in the Russian regions'. Issue 2. Moscow: RANEPA, AIRR, 2019. 108 p. (In Russian).
2015 addressing the issue of developing small and medium sized enterprises1. However, the focus of attention, as before, was on various measures of financial support, which can be of little effect in view of the currently underdeveloped social control institutions (independent mass media, professional associations, non-profit organizations, etc.).
On the whole, the situation in the SME sector has remained basically unchanged over several recent years: its basic development indices demonstrate some fluctuations, but no fundamental changes. This could be an indirect indication of an inadequate performance of the government support system. The targets and directions formulated in the Strategy of SME Development, and later on in the National Project SME and Support of Individual Entrepreneurial Initiative, still retain their importance. The key targets set in the national project are as follows: to increase the number of persons employed in the SME sector, including individual entrepreneurs (IEs), from 19.2 million in 2018 to 25 million in 2024; to increase the input of small and medium sized entrepreneurship in GDP from 22.3 percent in 2018 to 32.5 percent in 2024; and to increase the contribution by SME subjects, including IEs, to total non-raw-materials exports from 8.6 percent in 2018 to 10 percent in 2024.
The results of surveys of small and medium sized firms in Russia point to many weaknesses in the system of government support of entrepreneurship2. A study based on a representative sample of approximately 2000 firms, which reflected the structure of the SME sector in Russia, demonstrated that only a fraction of them had taken advantage of the government support programs targeting Russian businesses - 9 percent on average. The most popular answers to the question as to their reasons for not filing such an application were as follows: lack of access to information (92 percent), very small amount of funding to be received (51 percent), lack of trust in the government (45 percent), and excessively bulky reporting package that needs to be submitted in order to receive the support (34 percent). Meanwhile, the respondents generally estimate the effect of support to be quite low (2.2 points out of 5).
In 2017, different types of support were received by 166,000 SME subjects3, or 2.77 percent of their total number, although in the framework of the Strategy of SME Development it had been expected that by 2018, government support recipients would be not less than 5 percent of SMEs. Of these, 64 percent received support in the form of consulting - that is, the least effective form of assistance provided most often by way of educational seminars. Only 50 percent of the companies that received the support, whose data was entered into the FTS database, actually increased their turnover or staffing number by the year's end. The highest numbers of firms with improved performance
1 RF Government Directive No 1083-r dated June 2, 2016 'On Strategy of Small and Medium-sized Business Development in the Russian Federation for the Period until 2030' // Government of the Russian Federation. 2016. URL: http://government.ru/docs/23354/
2 The surveys were conducted by the RANEPA ISS's Sociological Research Center.
3 Report on the results of the study of the status and development of SMEs in the Russian Federation, the outcome of the implementation of measures of their support, and elaboration of estimate-based projections for their development. SME Corporation, Moscow, 2018.
indices were noted in Chukotka Autonomous Okrug, Tyumen Oblast, Ulyanovsk Oblast, Smolensk Oblast, Lipetsk Oblast, and Maritime (Primorsky) Krai.
The total volume of budget funding allocated to the implementation of the Subprogram Development of Small and Medium Sized Entrepreneurs hip of the RF Government Program Economic Development and Innovative Economy over the period from 2013 through 2020 amounted to RUB 123.5 billion, and it has invariably displayed a downward movement pattern (Fig. 24). In 2017-2018, up to 90 percent of support measures were earmarked for the SME support infrastructure1 (the service-mode support model); in money terms, its volume is relatively small, because the bulk of planned infrastructure has already been built.
25
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0,4
2018
5
0
Fig. 24. The volume of federal budget subsidies earmarked for government support of SMEs in Russia, billions of rubles
Source: Government of the Russian Federation. On the allocation, in 2017, of subsidies earmarked for government support of small and medium sized entrepreneurship. 2017. URL: http://government.ru/ docs/26283/
In 2015, SME Corporation began its activities, and in 2017, its capital amounted to RUB 92.8 billion2. The certificate of the national project targeting SMEs envisages a significant increase in the volume of financing, including that allocated to SME Corporation by way of providing a backing for its guarantees to SMEs, in the amount of RUB 14.3 billion. In fact, we should say that direct forms of support (subsidies to firms, loans, guarantees, government purchases, etc.) have prevailed after 2017.
1 Report on the use of federal budget funds for the government support of subjects of small and medium sized entrepreneurs and the assessment of efficiency of implementation of government support measures for small and medium sized entrepreneurship in the Russian Federation. RF Ministry of Economic Development, 2018.
2 For further details, see the RBC website at https://www.rbc.ru/economics/27/07/2018/5b59e 72b9a79474e8742c043
SME Corporation was initially set up as a systemic integrator of support measures granted to SMEs, but so far it has not been fully performing its functions of a single center. To be more particular, the policy programs within the system of support measures are dispersed between several ministries: the RF Ministry of Economic Development, the RF Ministry of Agriculture, and the RF Ministry of Industry and Trade. There is no single register of the support infrastructure entities, no single register of support recipients, and no monitoring of support instruments for all these government departments. It is not clear as to what economic effects have been produced by the SME support system, because these cannot be traced on the basis of the actual economic indices reported by that sector or the results of business surveys. We do not know in which regions the effects are highest. It should be admitted though, that SME Corporation has openly published rather detailed information concerning SME development.
On the whole, while the role of the RF Ministry of Economic Development, and consequently that of regional authorities, in shaping SME support policies has been declining, SME Corporation has been gaining in prominence while providing various forms of support1 to SMEs, including hi-tech and innovative companies, and to organizations operating as part of the SME support infrastructure. Formally, the key targets set for SME Corporation have been met2: the volume of purchases is on the rise, and the same can be said of the nomenclature of purchased products. According to data released by SME Corporation, by 2018 its lending volume had surged above RUB 121 billion, and the interest rate on loans was 10.6 percent per annum for small firms and up to 9.6 percent for medium sized ones; at the same time, the minimum loan amount was reduced from RUB 50 million to RUB 3 million, and the number of business navigator users rose to 300,000. At the same time, there is a certain balance shift in favor of direct support measures (lending, guarantees on loans), away from indirect forms of support (consulting, tax incentives). In this connection it has become known that in some cases3, financial support may push down the performance indices of those firms that receive it.
The regional aspect of support of small and medium sized enterprises also appears to be insufficiently elaborated. The budgets of regions receive financing under the Subprogram Development of Small and Medium Sized Entrepreneurship'4, calculated according to a formula that takes into account both the budget sustainability level and the number of SMEs in a given region. However, in spite of the frequent adjustments to
1 Article 25.1 of Federal Law No 209-FZ dated July 24, 2007 (as amended on November 28, 2018) 'On the Development of Small and Medium Sized Entrepreneurship in the Russian Federation'.
2 Report on the results of the study of the status and development of SMEs in the Russian Federation, the outcome of the implementation of measures of their support, and elaboration of estimate-based projections for their development. SME Corporation, Moscow, 2018.
3 Storey D. Six steps to heaven: Evaluating the impact of public policies to support small businesses in developed economies // In: The Blackwell Handbook of Entrepreneurship / Ed. by Sexton D., Landström H. New York: Blackwell Publishers Ltd, 2017. pp. 176-193.
4On the allocation, in 2017, of subsidies to government support of small and medium sized entrepreneurship. 2017. URL: http://government.ru/docs/26283/
that formula, the federal center, when elaborating its policy and support measures in respect of SMEs, still relies on the equalization principle, while foreign states apply a differentiating approach targeting the development of the strengths of each particular region (smart specialization). In Russia, in some cases it happens so that the less developed regions receive bigger amounts of funding to support their SMEs. These controversies do not conduce to the creation of effective incentives for regional authorities to develop the SME sector.
6.6.3. Comparable statistics for SMEs
The Strategy of SME Development until 2030 sets the target of doubling the input of the SME sector in GDP (from 20 to 40 percent)1, and the employment input target for SMEs was to increase that index from 25 to 35 percent, thus bringing it to the same level as in the developed countries. In the Presidential Executive Order2, it is set forth that the number of persons employed in the SME sector, including IEs and self-employed persons, should be increased from 19.1 to 25 million by 2024, and this, in fact, means that the deadline for meeting the SME employment input target has been moved from 2030 to 2024. The National Project SME and Support of Individual Entrepreneurial Initiative envisages that the input of the SME sector in GDP should be increased to 32.5 percent, and this roughly corresponds to the targets set by the Strategy of SME Development. According to data released by Rosstat, the input index in 2017 amounted to 21.9 percent of GDP.
One of the problems associated with strategic planning has to do with the impossibility to compare Russia's target indicator with those of other countries because of the differences between the criteria applied in attributing enterprises to the SME sector.
In foreign countries, the level of development of the SME sector is determined on the basis of indices reflecting the role of small and medium sized enterprises in the economy (GDP, turnover, exports) and in the social sphere (employment, new jobs, earnings). Meanwhile, on a global scale, there is no single definition and no unified criteria for indentifying an SME. Thus, in particular, only 46 of 132 countries attribute to the SME sector those enterprises that employ less than 250 people3. Only several countries rely on this single criterion (in addition, also proceeds, assets, and investments can be applied), and in many other countries different values of these indices are applied to different industries. The variability of criteria has to do with the objective institutional specificities of each country, differences in the structure of national economies, and
1 RF Government Directive No 1083-r dated June 2, 2016 'On Strategy of Small and Medium-sized Business Development in the Russian Federation for the Period until 2030' // Government of the Russian Federation. 2016. URL: http://government.ru/docs/23354
2 Executive Order of the President of the Russian Federation No 204 dated May 7, 2018 'On National Goals and Strategic Objectives of the Russian Federation through to 2024'. 2018.
3 Kushnir K. Micro, small, and medium enterprises around the world: how many are there, and what affects the count? // World Bank, 2010.
different government policy goals. The staffing number is calculated by different methods: thus, the employees having a second job or trainees can be taken into account or overlooked, etc. The same applies to affiliated organizations or various legal forms of an enterprise: self-employed, family business, partnership, association, firm, IE, NPO, and so on.
The main sources of statistical information on entrepreneurship development in different countries around the globe are the databases of the Organization for Economic Cooperation and Development (OECD)1 and Eurostat2, collected via the statistical data and metadata exchange (SDME) methodology.
According to their estimations, small and medium sized businesses in the OECD member states account for approximately 55 percent of GDP, approximately 59.1 percent of jobs, and more than 99.8 percent of all enterprises, and in the European Union member states the average relative share taken up by the SME sector is even higher: 57.5 percent of GDP, and 65 percent of all employed persons. For reference: according to OECD data, Russia's SME sector employs approximately 33 percent of all workers, while there is no data for its input in GDP.
The estimates of the development of small and medium sized enterprises in foreign countries are not applicable as Russia's targets. When comparing international data, the OECD relies on by-country enterprise samples. For Russia, the study samples are selected from the RUSLANA database, which relies on the information supplied by tax agencies. That database contains information only on 250,000 companies, while their total number in Russia is approximately 2.7 million3. The database overlooks individual entrepreneurs and most of micro companies, because these submit zero reporting, and also government organizations and the financial sector (banks). That is why the OECD and Eurostat apply the term business sector.
According to OECD data4, the business sector of SMEs in Russia employs 6.1 million persons, while the figure in the SME Register is 19.22 million. Evidently, only a small number of all such firms operating in Russia in entered in the OECD database for Russia.
A similar situation can be observed with regard to the structure of turnover and some other indices. OECD data indicate that in Russia, SMEs account for approximately 33 percent of all persons employed by companies. If we look at available Russian data, this figure may significantly vary depending on the denominator: thus, the share of persons employed by SMEs in the total number of employed persons recorded in H1 2018 is 26.5 percent, but if we take the average staffing number for the entire range of organizations, that index will amount to 38 percent5.
1 OECD. Entrepreneurship at a Glance 2017 2017. URL: https://www.oecd-ilibrary.org/employment/ entrepreneurship-at-a-glance-2017_entrepreneur_aag-2017-en
2 Eurostat: [website]. [2018]. URL: http://ec.europa.eu/eurostat/data/database
3 Unified Register of Subjects of Small and Medium Sized Entrepreneurship: [website]. [2018]. URL: https://ofd.nalog.ru
4 OECD. Entrepreneurship at a Glance 2017. URL: https://www.oecd-ilibrary.org/employment/ entrepreneurship-at-a-glance-2017_entrepreneur_aag-2017-en
5 The number of individual entrepreneurs is added both to the numerator and denominator.
If we should follow the methodology applied by OECD experts, we will need to subtract from the GDP structure the inputs of the public and financial sectors1, and then to divide the value added index of the SME sector by the remaining GDP value. In this case, according to our estimations, the input of SME in the value added produced by Russia's business sector in 2017 will be approximately 44 percent; for reference: according to Rosstat data, its index for total GDP is 21.9 percent, or half that number.
When we compare the relative shares of SME indices across different countries (Fig. 25), it becomes evident that the inputs of SMEs in the employment index and GDP strongly depend on the structure and size of a national economy. By this criterion, Russia is closer not to the EU member states, but to the USA, Canada, or Japan, because it develops labor-intensive and capital-intensive sectors, relying on a high index of average company size.
90
Italy
Ireland
80
Mexico
New Zealand
Estonia
3 •a a
70
60
° 50
40
Canada
30
ft
bourg
Israel Switzerland
Russia
Russia (max)
20
20
30 40 50 60 70
GDP input of small and medium-sized firms (business sector)
80
90
Note. The size of sphere depends on the ratio of a country's GDP volume to the total number of firms; the names of top ten countries by that index are in semi-bold; black spheres correspond to post-socialist countries; Russia (max) represents the maximum estimated values for the Russian Federation of the indices under consideration.
Fig. 25. The relative shares of GDP and employment inputs of the SME sector
in different countries
Source: own calculations based on data released by the OECD, Eurostat and Rosstat.
1 From Russia's GDP, the value added of the financial and insurance sectors (4.3 percent) and the input of the public sector (46 percent) are subtracted. See Abramov A. E., Aksenov I. V., Radygin A. D., Chernova M.I. Modern approaches to measuring the state sector: methodology and empirics // Economic Policy. 2018. V. 13, No 1, p. 36-39.
A comparison of these indices demonstrates that the situation with regard to SME development in Russia is less catastrophic than it may appear at a first glance, when the differences in estimation methodologies are not taken into account; indeed, it simply has its own specificities produced by a wide range of factors. Therefore, in this case there is no necessity to bring the current indices to the level that is typical of the EU and the OECD member states.
Russia's problem is not that there are too few small and medium sized enterprises, but that the SME sector, by its qualitative characteristics, cannot match its counterparts existing in the developed countries: there are too few exporting and industrial companies, technological startups and innovative companies, and a greater number of enterprises operate outside of legal regulation, fully or in part.
The SME statistics in Russia are controversial and incomplete. An analysis based on available statistical data does not yield a distinct picture as to the level and the pace of development of Russia's SME sector. In addition to the annual reports released by Rosstat, monthly data have been published since 2016 by the Unified Register of Subjects of Small and Medium Sized Entrepreneurship operated by the RF Federal Tax Service.
Due to the differences in the data collection methods used by different government departments, as well as some complications in the operation of the recently created Unified Register, statistics vary with regard to the number of SMEs. Thus, for example, according to data in the Unified Register, as of September 2017, a total of 2.999 million individual entrepreneurs (IE) in the category of SME subjects were registered in Russia; according to the FTS1, their number was 3.7 million; and according to Rosstat data -2.561 million. Rosstat calculates the number of IEs by extrapolating sample data to the entire sector; the Unified Register records those IEs who have submitted at once their entire reporting package; and the FTS collects data in the framework of EGRIP (Unified State Register of Individual Entrepreneurs), which also contains data on those IEs that are in fact absolutely idle and do not submit any reports.
Calculations based on employment data may give rise to their duplication, if an IE also holds a job with another employer, including another SME. Such a situation frequently occurs with regard to legal entities, when an entrepreneur is registered as an IEs and at the same time owns an LLC, where he or she occupies a post of director or deputy director - that is, holds a job.
By their labor productivity index, Russia's small and medium sized firms, most probably, lag far behind their counterparts in the developed countries, but there are no available correct indices for a reliable estimation. If the turnover to staffing number ratio is to be applied (the same index as applied in the Strategy of SME Development), Russia will match the level of some developing countries (Brazil and Mexico)2. But if we make a comparison between Russia's regions, the leaders will be the regions with the least
1 RF Federal Tax Service's website [2018]. URL: https://www.nalog.ru
2 OECD. Entrepreneurship at a Glance 2017 2017. URL: https://www.oecd-ilibrary.org/employment/ entrepreneurship-at-a-glance-2017_entrepreneur_aag-2017-en
staffing number reported by SMEs and the highest share of the shadow sector: the Chechen Republic, the Republic of Dagestan, and the Republic of Ingushetia. In fact, the firms there report underestimated employment indices. So, this estimation system has some serious weaknesses.
So far, Russia has lacked an adequate entrepreneurship development indicator, especially at the regional level:
- the high number of firms in the SME category may be the result of splitting-up of bigger enterprises for the purpose of claiming tax exemptions and participating in government purchases;
- the employment index of SMEs strongly depends on the economic situation: it varies depending on the percentage of unrecorded and part-time employment, etc.;
- the GDP input of SMEs is an index that is not calculated in accordance with a single approved methodology, its value may differ depending on a specific calculation method and the use of data for the public, financial and shadow sectors;
- the index of business births (the number of new firms) may reflect the emergence of fly-by-night firms, it varies depending on data source.
The national project targets cannot be reliably calculated, either. Thus, in particular, there is no methodology for calculating the input of exporting SME subjects in the total volume of non-raw-materials exports.
6.6.4. Unpredictability of the policy of support of small and medium sized enterprises in Russia
The development of SME in Russia is practically not influenced by government support in its present form, although it is a well-known fact that any inconsistency in decision-making is fraught with negative effects. The dynamics and specificity of entrepreneurship development in the regions depend on the ongoing macroeconomic and institutional changes. Meanwhile, the current policy effectively overlooks the versatility of both the types of SMEs and regional conditions.
The unpredictability of government policy pushes SMEs into the shadow economy. The policy targeting SMEs often lacks in logic. A promise not to raise taxes1 is followed by a raise of insurance contributions2. The intention to simply calculate the total number of self-employed persons and to let them work on a legal basis without making worse their current situation gives way to the imposition of taxes and fines for a failure to pay them3. The low level of trust in established institutions across society results in growth
1 Presidential Address to the Federal Assembly of December 4, 2014: 'I propose to freeze the existing tax parameters as they are for the next four years, not revisit the matter again, not change them'.
2 The new formula for calculating the insurance contributions to the RF Pension Fund was based not on the amount of profits, but on the amount of proceeds (without deducting costs). As a result, many IEs had to apply the highest tariff - RUB 138,600, and not RUB 32,500 as under the previous system. When the minimum wage is increased, so will jump the contributions to the social funds.
3 From January 1, 2019, professional income tax was introduced for self-employed persons.
of the informal sector1. The relative shares of self-employed people and similar categories of citizens who do not consider themselves to be unemployed, but who are not officially registered as hired workers or IEs, are on the rise.
From a formal point of view, the self-employed people and similar categories of citizens operating in the informal sector can translate into an increasing number of people employed by SMEs. In 2017, their number was 8.5 million, which is above the employment growth rate for SMEs set as a target in the Presidential Executive Order (just under 6 million). However, the state so far has failed to create incentives for their legalization.
In 2017, a tax holiday was introduced for those self-employed persons who used no hired labor2: private tutors, nannies, housekeepers, caregivers. A zero rate was applied to the taxes and insurance contributions on their incomes received in 2017 and 2018, on condition that the FTS should be notified of the fact of self-employment. However, as of December 2018, only 2,880 self-employed persons (0.03 percent) had legalized their status, and some of them, who had been previously registered as an IE, simply changed their status.
The new draft law on the introduction, by way of experiment, of professional income tax in several pilot regions3 has been sharply criticized by experts: they argue that the absence of significant incentives to register a legal status coupled with the rising financial costs for entrepreneurs may translate into a situation where no accelerated legalization will actually take place. However, since early 2019, 30,000 Russians have registered as self-employed through the app My Tax4.
Government support has no influence on the development of SMEs in the regions. Our estimations5 demonstrate that entrepreneurial activity in Russia's regions does not depend on subsidies, tax exemptions, or the volume of government purchases. Quite often, support is repeatedly allocated to the same firms, which may be affiliated with local administrations. Several IEs6 participate in the purchases to the value of billions of rubles by big companies (for example, RZD OJSC). The access to government purchases and tax exemptions serves as an incentive for artificial splitting-up of firms, which has absolutely nothing to do with the SME sector's development. However, subsidies are
1 Anokhin S., Schulze W. 'Entrepreneurship, innovation, and corruption.' Journal of Business Venturing, Vol. 24, No. 5, 2009, pp. 465-476.
2 Self-employed persons are understood to be those RF citizens who provide services to individuals but are not registered as individual entrepreneurs, e.g., nannies, private tutors, drivers, designers, interpreters, photographers, repair and construction workers, etc.
3 Federal Law No 422-FZ dated November 27, 2018 'On launching the experiment of establishing a special tax regime Professional Income Tax in the city of Moscow, in Moscow Oblast and Kaluga Oblast, and in the Republic of Tatarstan' // Consultant Plus. 2018. URL: http://www.consultant. ru/law/hotdocs/55771 .html/
4 For more details, see https://www.kommersant.ru/doc/3889871
5 Barinova V. A., Zemtsov S. P., Tsareva Y. V. Entrepreneurship and institutions: Does the relationship exist at the regional level in Russia? // Voprosy ekonomiki, 2018. No 6, p. 92-116. (In Russian).
6 RBC study: How IEs in Russia receive billions of rubles from the State // RBC. 2017. URL: https://www.rbc.ru/own_business/13/12/2017/5a1d68bb9a7947745d083338
important for underdeveloped municipalities, where they can help to create new jobs and to solve, to a certain extent, the existing social problems.
In our calculations, entrepreneurial activity was understood as the ratio of the number of small (including micro) enterprises in a given region to the number of its economically active population1. In a sense, this is a proxy variable for the region's 'entrepreneurial capital' level, in contrast to registration or early phase of entrepreneurial activity, as the latter reflect only the fact of registration or business intentions2.
To test the hypothesis of the influence of government on entrepreneurial activity, we developed an empirical model. The dependent variable is entrepreneurial activity in the regions. The control variables are the rate of unemployment, access to markets, and institutional conditions. The independent variables are the various government support estimates3: the volume of subsidies allocated in the federal budget to RF subjects for the support of SMEs, as the amount of support in rubles per SME; the total sum of tax exemptions granted to organizations, as the amount of exemptions in rubles per organization.
The effects on government support on the development of small businesses are controversial, because empirical studies often underestimate the selection effect, when known strong firms are supported4. Thus, in particular, the study by KPMG5,6, while describing the high effect of support measures received by SMEs in Russia, offers no
1 It reflects the degree of population involvement in the creation of new types of businesses, as well as in the management and development of the existing companies, and so it can be treated as the main indicator of SME development at the regional level. Although this indicator in influenced by another factor - the registration of fly-by-night companies, we believe that it is appropriate for achieving our study's goals. On the one hand, fly-by-night companies are entered on records only with regard to the by-region distribution of micro enterprises hiring a small number of staff, while the by-region distribution of small firms with a staffing number of more than 15 can be considered to be free from the effects of that phenomenon. On the other hand, the correlation coefficient for the number of micro enterprises that determine our dependent variable's distribution and that of small firms, on average over the period from 2008 through 2015, amounted to 0.95 (in 2015, it was 0.99). In other words, even if the sample takes into account fly-by-night companies, these register in those regions where the level of entrepreneurial activity is already high.
2 National report 'Global Entrepreneurship Monitor'. Russia 2016/2017', Graduate School of Management, St. Petersburg State University, St. Petersburg, 2017.
3 Barinova V. A., Zemtsov S. P., Tsareva Y. V. Entrepreneurship and institutions: Does the relationship exist at the regional level in Russia? // Voprosy ekonomiki, 2018. No 6, p. 92-116. (In Russian).
4Storey D. Six steps to heaven: Evaluating the impact of public policies to support small businesses in developed economies // In: The Blackwell Handbook of Entrepreneurship / Ed. by Sexton D., Landstrom H. New York: Blackwell Publishers Ltd, 2017. pp. 176-193
5 KPMG is an audit company on the global top four list. The name 'KPMG' stands for the first letters of the names of its founders - Piet Klijnveld, William Barclay Peat, James Marwick and Reinhard Goerdeler.
6Performance assessment of the SME support program of the RF Ministry of Economic Development // SME federal portal. 2015. URL: http://smb.gov.ru/files/images/MSP-Executive+summary_final.pdf.
assessment of the said effect. As noted by Chepurenko1, Russia also needs more complete records of the framework conditions of the SME sector's development, such as the quality of institutions, regional specificities, etc.
The regions differ significantly by the volume of received government support. Subsidies are allocated in accordance with the approved formula, which is geared to the size of SME sector and the results of support received over the previous period. The largest amount of support was provided to Voronezh Oblast (10.8 percent of the nationwide total), the Republic of Mordovia (7.9 percent), the city of St. Petersburg (4.3 percent), Omsk Oblast (3.97 percent), Nizhny Novgorod Oblast (3 percent), Murmansk Oblast (2.97 percent), Samara Oblast (2.95 percent), and the Republic of Tatarstan (2.85 percent). The correlation coefficient for the volume of subsidies and the number of SME subjects (sector size) is 0.5, but there is no correlation with the number of supported SMEs, and so it can be concluded that the support of enterprises strongly varies by region.
The average subsidy volume per SME amounts to RUB 3,300. In 2016, for some underdeveloped regions this index was above RUB 20,000: the Republic of Tyva, the Republic of Khakassia, Jewish Autonomous Oblast, Altay Krai, the Republic of Ingushetia, and the Karachay-Cherkess Republic. In these regions, the informal sector's share is significant. The minimum volume of support per SME was noted in the regions with a high sector size index. The subsidy volume per supported enterprise likewise varies significantly. In the regions with the maximum support volume it exceeds RUB 4 million: in the Karachay-Cherkess Republic, Kamchatka Krai, Nenets Autonomous Okrug, the Republic of Tyva, the Republic of Adygea, Altay Krai, the Jewish Autonomous Oblast, Magadan Oblast, Kostroma Oblast, and Voronezh Oblast. In the regions with difficult natural conditions this happens because of the elevated costs. In the regions with the lowest ratio, the support volume per enterprise amounts to several thousands of rubles: in Vologda Oblast, Ulyanovsk Oblast, Kaliningrad Oblast, Sverdlovsk Oblast, Kursk Oblast, Novosibirsk Oblast, Krasnodar Krai, and the Chechen Republic. Evidently, the support received in such amounts cannot produce any serious effect on the development of enterprises; more often it is spent on educational and consulting seminars.
The nationwide index of the relative share of SMEs that have received government support amounts to a modest 2.77 percent2, and it is relatively stable. In the leader regions it is above 10 percent. The latter are, in the main, those regions that set the goal of mass-scale development and support of SMEs. The regions where support is granted to less than 1 percent of companies are major centers with a developed SME sector: the
1 A.Yu. Chepurenko. What is entrepreneurship and what entrepreneurship policy does Russia need? (Marginal notes on works of modern foreign classics) // Journal of the New Economic Association, 2012. V. 14, No 2. P. 102-124.
2 Report on the results of the study of the status and development of SMEs in the Russian Federation, the outcome of the implementation of measures of their support, and elaboration of estimate-based projections for their development. SME Corporation, Moscow, 2018.
city of Moscow, Moscow Oblast, and also the regions where the SME sector is dispersed among remote settlements: Orenburg Oblast, Magadan Oblast, the Republic of Kalmykia, Kamchatka Krai, Yamalo-Nenets Autonomous Okrug.
Regions also vary significantly by the effects of government support. One newly created or preserved job in the best-performing regions that have effectively created their own entrepreneurial ecosystems costs less than RUB 20,000: Altay Krai, Ulyanovsk Oblast, Leningrad Oblast, Novosibirsk Oblast, Kaluga Oblast, and Kaliningrad Oblast. The administrations of these regions strived to cover the SME sector by a broad network of microsubsidies. The ratio of newly created or preserved jobs to the total number of persons employed in the SME sector is also higher in these regions. But there are also some regions where one newly created or preserved job costs the State millions of rubles: the city of St. Petersburg (RUB 9 million), the Republic of Mordovia (RUB 8 million), Nenets Autonomous Okrug (RUB 6 million), the Karachay-Cherkess Republic (RUB 5.5 million), Novgorod Oblast (RUB 1.6 million), the Republic of Tyva (RUB 1.4 million), and Voronezh Oblast (RUB 1.4 million). Meanwhile, the effect of support on growth in the total number of SME staff is negligible.
Tax exemptions are generally equally granted to all regions, and target predominantly medium sized and big firms (for example, within special economic zones), that is, small firms do not see any advantages relative to particular regions, and so no effect was observed with regard to that factor, either.
The level of entrepreneurial activity is palpably higher in the regions harboring biggest agglomerations (Fig. 26) - the cities of Moscow and St. Petersburg, Novosibirsk Oblast, Sverdlovsk Oblast, Tyumen Oblast, Perm Krai; in those with favorable institutional conditions (the cities of Moscow and St. Petersburg, and Tyumen Oblast, which top the ASI's ranking1); and in those with beneficial economic and geographical situation, i.e., proximity to major foreign markets and the Moscow agglomeration: Kaliningrad Oblast, Primorsky Krai, Yaroslavl Oblast, etc.2 Agglomerations are characterized by a higher concentration and versatility of economic activity, and consequently a lower monopolization index; very often they have better formal institutions, and so the entry barriers there are lower, but competition is higher. Besides, they have a bigger consumer market, while a majority of SMEs operate in the trade sector3. Besides, a prominent role in the group of leaders is played by the southern regions with their high relative share of the tourism industry - for example, Krasnodar Krai, the Republic of Crimea.
1 National Regional Investment Climate Ranking (Agency for Strategic Initiatives) for 2017 // ASI. 2017. URL: http://asi.ru/investclimate/rating/
2 Zemtsov S. P., Baburin V. L. Assessing the Potential of Economic-Geographical Position for Russian Regions // Ekonomika regiona, 2016. V. 2, No 1, P. 117-138. (In Russian).
3 The majority of small and medium sized enterprises operate in the trade sector (28 percent of total employment in the SME sector), the sector of real estate deals, lease and services (19 percent), and in manufacturing industries (16 percent).
Fig. 26. The by-region differentiation of entrepreneurial activity in Russia
Source: Unified Register of SMEs.
The high investment risks associated with the social, financial and ecological situations in the regions, and high crime rates are the factors that suppress the growth of entrepreneurial activity1. Accessibility of banking services, on the contrary, boosts its growth. A higher banking infrastructure density may be an indicator of low interest rates resulting from competition between banks, and so can be used as a proxy for estimating capital accessibility. Every year, small firms refer to insufficient access to financing as one of the most important factors that restrict their growth2. Human capital improvement3 in a region, according to our estimations, should also have a positive effect on entrepreneurial activity growth, because in order to create a successful business, in most cases one should possess a certain set of knowledge and skills.
For the development of entrepreneurship in Russia's regions, the per capita gross regional product (GRP) and a region's market potential are very important, because these may be the indicators of demand for services rendered by entrepreneurs. The former is also an indirect indicator of quality of life and of effective demand. The latter is applied to estimate the proximity (accessibility) of major international and regional markets. The nearer a firm to consumers with a high purchasing power and a big goods
1 Barinova V. A., Zemtsov S. P., Tsareva Y. V. Entrepreneurship and institutions: Does the relationship exist at the regional level in Russia? // Voprosy ekonomiki, 2018. No 6, p. 92-116. (In Russian).
2 Main business activity indices of small enterprises (less micro companies) // Rosstat. 2018. URL: http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/enterprise/reform/#
3 Barinova V. A., Zemtsov S. P., Tsareva Y. V. Entrepreneurship and institutions: Does the relationship exist at the regional level in Russia? // Voprosy ekonomiki, 2018. No 6, p. 92-116. (In Russian).
and services market, the higher its opportunities for selling its finished product and purchasing equipment, spare parts, raw materials, and other goods.
Thus, the development of entrepreneurship in Russia's regions is influenced by institutional and macroeconomic factors, and so any amendments to legislation or a plunge of personal income may actually offset all the positive trends created by government support.
Overall, the entrepreneurial activity level across Russia is characterized by a high changeability and territorial heterogeneity. However, some regions are capable of sustaining a high entrepreneurship development level over a long period of time1.
In foreign countries it was found that a high level of entrepreneurial activity persisted in some regions for centuries2. In those regions (Bavaria, North Rhine-Westphalia, and some others), entrepreneurship has developed very deep roots in the form of accumulated information, knowledge and business skills, interaction networks and an environment of trust. The average correlation coefficient for entrepreneurial activity in Russian regions between a year under consideration and the previous year is 0.97, and for that between a year under consideration and 15 years earlier - 0.51; so, on the whole, the regional structure of entrepreneurial activity displays a rather high degree of inertia.
We selected a group of regions that displayed high entrepreneurial activity indices over the period 1998-20143: the cities of St. Petersburg and Moscow, Kaliningrad Oblast, Novosibirsk Oblast, Samara Oblast, Yaroslavl Oblast, Sverdlovsk Oblast, Belgorod Oblast, and Omsk Oblast. They maintained a combination of factors that favored the development of small and microenterprises throughout the entire period under consideration: a large consumer market, no monopolization of the economy, high diversification, and relatively beneficial institutional conditions. Most of these regions harbor big agglomerations.
The regions with long-standing entrepreneurial traditions may be viewed as future sites of intensive socioeconomic growth. In fact, these regions have developed sustainable entrepreneurial ecosystems.
The regions that displayed high indices only during certain periods, are geographically close to the regions of the first group (Leningrad Oblast, Tomsk Oblast, Altay Krai), and also to seashores (Krasnodar Krai, Primorsky Krai, Khabarovsk Krai, and Rostov Oblast). When identifying the entrepreneurship factors, special attention should be focused on those regions that were constantly upgrading their status by moving upwards in the ranking during both subperiods: Tyumen Oblast, Kirov Oblast, Ulyanovsk Oblast, Lipetsk Oblast, Pskov Oblast, and Khabarovsk Krai. It can be assumed that these are regions that relied on successful practices.
1 Zemtsov S. P., Tsareva Y. V. Entrepreneurial activity in the Russian regions: How spatial and temporal effects determine the development of small business // Journal of the New Economic Association. V. 37. No 1. 2018. P. 145-165.
2 Fritsch M., Wyrwich M. The long persistence of regional levels of entrepreneurship: Germany, 19252005, // Regional Studies, 2014. Т.48, No 6. С. 955-973).
3 Zemtsov S. P., Tsareva Y. V. Entrepreneurial activity in the Russian regions: How spatial and temporal effects determine the development of small business // Journal of the New Economic Association. V. 37. No 1. 2018. P. 145-165
According to the results of econometric calculations, the entrepreneurial activity index in a region strongly depends on its level over the two previous years, and is also influenced by similar activity in the neighboring regions not farther than 300 km.
We identified interregional entrepreneurial activity clusters where the leader regions are concentrated (Novosibirsk Oblast and Tomsk Oblast), and also the outsider regions (the North Caucasus). In the former case, the high activity in these regions correlates with the high activity in the neighboring regions, in the latter - the situation is directly opposite. In foreign countries, this phenomenon is explained by the interregional knowledge spillover effect1. If that is the case, the former can be explained by the intense interaction between two cities and cultural similarities, in particular the decades-long influence of Siberian higher educational establishments. The latter may have to do with the negative influence of institutional environment in the North Caucasus region.
The dependence of the level of entrepreneurial activity on its level over the previous periods, the stable existence, among the regions, of leaders and outsiders, and also of a great number of regions with fluctuating entrepreneurial activity movement patterns may all serve as a substantiation for territorially differentiated policies in the SME sector.
At present, although the government support of SMEs targets different groups of entrepreneurs (beginners, microenterprises, small, and medium sized enterprises), in actual practice it still has little regard for their sectoral and regional differences. The institutional differences between regions rather strongly influence the development of entrepreneurship, in spite of the nationwide successful implementation of the National Entrepreneurial Initiative and progress in the Doing Business ranking. These differences also influence the implementation of those legislative initiatives that are not geared to regional specificities. For example, in the study by E. Yakovlev and E. Zhuravskaya2 it is demonstrated, on the basis of econometric calculations, that after 'Grefs reform' launched in order to simplify the registration procedures and lower the administrative pressure, the index of business births in the early 2000s varied between the regions depending of the quality of their institutions. In some regions, the reforms gave rise to a growing number of small firms, and elsewhere they could conduce to the shadow sector's expansion. In our opinion, local and regional authorities should view entrepreneurship development as their priority, but the existing fiscal system does not conduce to a systemic interaction with the SME sector. One can see a lack of understanding of SME specificities and the differences of their development conditions in different territories, including legislation unification, and provision of support regardless of business type and location. This results in a poor correlation between the support measures and the actual needs of businesses, the absence of distinctly understood priorities, and significant policy inconsistencies.
1 Audretsch D., Lehmann E. Does the knowledge spillover theory of entrepreneurship hold for regions? // Research Policy. 2005. Т. 34. No 8. С. 1191-1202
2 Yakovlev E., Zhuravskaya E. The unequal enforcement of liberalization: Evidence from Russia's reform of business regulation // Journal of the European Economic Association. 2013. Т. 11. No . 4. С. 808-838.
6.7. The defense economics and the military reform in Russia1
6.7.1. The military personnel and social policy
In 2018, the total strength of the Armed Forces (AF) of the Russian Federation did not change. Early in February 2018, the President of the Russian Federation increased by 200 persons to 10,740 persons the ultimate staff number of the Central Office of the Ministry of Defense (without the guarding and building maintenance personnel taken into account), which is not included in the strength of the Armed Forces2.
Proceeding from the manning level3 declared in November, in 2018 the total accountable strength of the Armed Forces exceeded 950,000 persons, an increase of 20,000 persons as compared to the end of 2016. According to the data of telephone conferences of the Ministry of Defense, the number of compulsory-duty servicemen of the Armed Forces decreased within a year by 3.2 percent to 232,280 persons. In 2018, 260,500 persons were drafted to the military service, a decrease of 15,500 persons (5.7 percent) as compared to the year before4. Also, 684 persons, including 160 persons with four research squadrons of the Era military innovation technopolis established on the initiative of the Ministry of Defense in the city of Anapa in 2018, served in 16 research squadrons established since 2013.5 Apart from four sport squadrons with 171 conscripts, in 2018 the Ministry of Defense established four R&D squadrons in the city of Tula, Severodvinsk, Kaliningrad, and Sevastopol with the total strength of 109 persons "in order to direct young people to enterprises of the military-industrial complex"6.
In 2018, the number of the contract military servicemen (privates and the junior command personnel) rose to 393,800 servicemen (Fig. 27); to achieve that strength, over 60,000 persons were hired to serve on contract7. At the Collegium of the Ministry of Defense, it was declared about the planned increase in the number of this category of military servicemen to 475,000 persons by the end of 2025; for this purpose an average
1 This section was written by Vasily Zatsepin, RANEPA.
2 Executive Order No.60 of February 09, 2018 "On Amendment of Executive Order No.1062 of August 16, 2004 of the RF President "On the Issues of the Ministry of Defense of the Russian Federation" and the Statute Approved by that Executive Order".
3 Tikhonov A. Ambitious Tasks should Be Always Set // The Krasnaya Zvezda. November 6, 2018 (Issue No. 124). p.4.
4 Executive Order No. 129 of March 30, 2018 of the RF President and Executive Order No. 552 of September 28, 2018 of the RF President.
5 Executive Order No. 364 of June 25, 2018 of the RF President and Executive Order No.501 of August 28, 2018 of the RF President.
6 According to Burdinsky E., Head of the Main Organization and Mobilization Department of the Joint Staff. URL: https://function.mil.ru/news_page/country/more.htm?id=12198737@egNews (date of reference: 07.10.2018).
7 The meeting of the Collegium of the Ministry of Defense. Moscow, 18.12.2018. URL: http://www.kremlin.ru/events/president/news/59431 (date of reference: 18.12.2018).
annual increase of about 11,700 persons - four times less than the failed plan of 2012 -will be required.
450,0 400,0 350,0 300,0 250,0 200,0 150,0 100,0 50,0 0,0
Fig. 27. The manpower of the Armed Forces (contract privates and junior command personnel) in 2012-2018, thousand persons
Source: The Krasnaya Zvezda. December 19, 2018 (Issue No.142). p.4.
In 2018, over 60,000 persons underwent training at 28 military educational establishments and eight branches1; apart from that, 60,000 students of civil higher education institutions were trained at 93 military centers without suspending their studies. As a result of release of three classes of graduates from higher education institutions of the Ministry of Defense - in March, June and December - over 12,000 officers, including 1,300 young pilots were directed to the Armed Forces. Sergei Shoigu, Minister of Defense noted in particular that "this year, the system of the military education was restored in full and higher education institutions of the Ministry of Defense have managed to prepare graduates properly"2.
According to the mass media's reports, district six-month courses of squad commanders of critical skills will be established again in the Army for soldiers and sergeants serving on the contract basis. In 2018, over 7,000 servicemen of this category received the rank of a warrant officer, warrantor and officer.
In 2018, the number of servicemen being at the disposal of their commanders and superiors and on the waiting list for the receipt of permanent housing fell from 1,400
1 The issues of state end-of-course assessment of graduates of military higher education institutions were discussed at the Ministry of Defense of the Russian Federation. Moscow, 28.02.2019. URL: https://function.mil.ru/news_page/country/more.htm?id=12219462@egNews (Date of reference: 01.03.2019).
2 See: The meeting of the Collegium of the Ministry of Defense.
2012 2013 2014 2015 2016 2017 2018
persons in February to 96 persons in December1, which situation suggests that this issue can be completely solved within the next few months.
In 2018, money allowances of military servicemen and pensions of the Ministry of Defense were increased by 4 percent from January 1 to their average values of RUB 68,800 and RUB 24,600, respectively2. It is to be noted that money allowances of contract soldiers and sergeants remain much below the average level.
In 2018, permanent housing was provided to 8,500 servicemen of the Ministry of Defense, a decrease of 15 percent compared to the previous year (10,000 servicemen). In 2018, service housing was granted to 37,283 servicemen of the Ministry of Defense (about 31,000 servicemen in 2017)3. In 2018, the Service Housing Fund of the Ministry of Defense increased by 16,500 apartments and at present includes over 275,000 service residential premises. The data on the number of persons on the affordable housing waiting list and in need of service housing have not been published. The savings and mortgage system is currently the Defense Ministry's main way of solving the housing issue. Early in the year, 212,000 servicemen with other 43,000 servicemen joining later in the year participated in that system. In 2018, the annual saving contribution allocated out of the federal budget per participant was equal to RUB 268,465.6.
On instructions of the President of the Russian Federation, in 2018 together with the heads of the subjects of the Russian Federation the Ministry of Defense succeeded in reducing by 97 percent and 99 percent the waiting list to pre-school institutions and the number of military servicemen's family-members in need of employment, respectively, in all the subjects of the Russian Federation, except for, Dagestan, North Osetia-Alania and the Sakhalin Region, where 202 children were left without a place in the kindergarten4.
In August, Valery Gerasimov, Head of the Joint Staff ordered district commanders, commanders-in-chief of the branches of the Armed Forces and commanders of corps to stop the practice of violating the duty-time rules: holding staff meetings at night, on weekends and holidays, keeping servicemen after hours "until the departure of the superiors" and ordering servicemen to come on duty at their off-duty time without any necessity5. In addition, to establish equal rights of servicemen to rest and leisure, at the autumn session of the Federal Assembly legislators annulled the limitations for
1 Tomilenko E. Construction Projects are Being Developed at High Rate // The Krasnaya Zvezda. December 17, 2018 (Issue No. 141). p. 3.
2 The average money allowance in the Armed Forces is notionally considered the one of a lieutenant serving as a troop commander. See: Tatyana Shevtsova: After 2021 the State Defense Order will be Gradually Decreased. Moscow, 18.12.2018. URL: https://www.vesti.ru/videos/show/vid/781907/ cid/3962/# (date of reference: 18.12.2018).
3 The Minister of Defense held a telephone conference with the High Command of the Armed Forces. Moscow 25.12.2018. URL: https://function.mil.ru/news_page/country/more.htm?id=12209596@egNews (date of reference: 26.12.2018).
4 See: The Meeting of the Collegium of the Ministry of Defense.
5 Safronov I. Valery Gerasimov is Going to Regulate the Time-Schedule //The Kommersant daily. September 3, 2018. (Issue No. 158). p. 6.
servicemen of permanent readiness units on additional holidays granted for official duty performance in excess of the established weekly period of duty1.
Established in November on the basis of the Main Morale Building Department of the Ministry of Defense, in addition to organization of military and social activities the Main Military and Political Department of the Armed Forces will deal with consolidation of the military discipline and prevention of lawlessness because the situation with such cases in the Armed Forces remains quite tense. According to the data of the Main Military Investigation Department, in 2018 in entities which were subordinate to the military investigation the total number of registered crimes increased by 2.2 percent and exceeded 10,000 cases. A positive downward trend of reduction of crimes in the troops of the Federal National Guard, the EMERCOM and the Federal Security Guard Service was registered, while quite the opposite trend was observed with the Ministry of Defense and the Federal Security Service; within a year, the number of cases of abuse of power and bribery increased by 30.5 percent and 30.9 percent, respectively. It is reported that 2,144 cases of corruption (growth of 4.4 percent) were registered. At the same time, the number of the registered cases of application of physical force to subordinates fell by 9 percent to 489 cases, while violations of the regulations dealing with mutual relations between the servicemen (the harassment of subordinates), by 3.7 percent to 573 cases2.
According to the data of the Main Military Prosecution Office, in 2018 the damage from military corruption crimes increased four-fold and exceeded RUB 7 billion; according to the acts of response of the prosecution office 2800 functionaries were brought to disciplinary responsibility including 28 officials dismissed due to the loss of confidence3. According to the mass media's reports, it became known that criminal cases were initiated in 2018 due to the fact of corruption at the Department of Audit of State Contracts of the Ministry of Defense, the Military Academy of the Joint Staff and the 46th Central Research and Development Institute of the Ministry of Defense4, which overstated the value of contracts and used "deadheads" and fly-by-night companies.
As regards the general public's attitude to the Armed Forces, in 2018 a turning point occurred according to the data - published by the All-Russia Public Opinion Research Center later that year - of the sociological survey ordered by the Ministry of
1 Filachev O. The Parliament is the Place for Debates // The Voenno-Promyshlenny Kurier. January 15, 2019 (Issue No. 1).
2 In 2018 the number of corrupt practices and briberies among servicemen increased by 30 percent. URL: https://tass.ru/armiya-i-opk/6171158 (date of reference: 01.03.2019).
3 Gavrilov Yu. Dismissed With No Confidence // The Rossiiskaya Gazetta. March 22, 2019 (Issue No. 63).
4 Senatorov Yu. The Colonel Reported On the Deputy // The Kommersant daily. February 7, 2019. (Issue No. 22). p. 4; Sergeyev N. A Mediator on Syria was Asked Not to Meddle // the Kommersant daily. January 28, 2019. (Issue No. 14). p. 4; Sidorkova I., Alekhina M. Developers of the State Armament Program were Accused of Fraud. URL: https://www.rbc.ru/society/16/01/2019/5c3df3489a79471f974d 126f (date of reference: 16.01.2019).
Defense1.For the first time since 2013, the share of the Russians who believed that the state of things in the Armed Forces was excellent or good decreased by 1 percentage point to 61 percent as compared to the previous year; the share of those who believed that it was moderate increased by 3 percentage point to 27 percent, while as many as 6 percent of the Russians found it unsatisfactory (+1 percentage point). The overall level of approval of the Armed Forces' activities decreased (-1 percentage point, to 87 percent), as well as the job rating of Sergei Shoigu, Defense Minister (for the first time since 2014 it fell from 4.7 percent to 4.6 percent); the share of those who trusted the Defense Minister fell by 9 percentage point to 39 percent).
An important shift in public sentiments was registered by the Institute of Sociology of the Russian Academy of Sciences. If in October 2014 67 percent of the respondents believed that "Russia should be a great power with the mighty Armed Forces", in October 2018 this opinion was shared only by 49 percent of the respondents (-18 percentage point). Also, 51 percent of the respondents against 33 percent of the respondents in October 2014 are now confident that "Russia should care about the well-being of its own people, while the country's greatness and military might are secondary"2.
6.7.2. The military-technical policy
In January 2018, President Vladimir Putin approved the latest State Armament Program (SAP) in 2018-20273. For implementation of the SAP, it is envisaged to spend RUB 20.0 trillion, of which RUB 19.0 trillion is meant for purchasing, repair and development of arms, as well as military and specialized equipment and RUB 1.0 billion, for building the infrastructure for the benefit of the SAP4. Any further information on the program is unavailable due to the fact that it is completely classified, however, as early as March Sergei Shoigu, Minister of Defense requested proposals to be prepared to modify it5.
The beginning of the new political cycle did not virtually change the existing work schedule. In May and November, President Vladimir Putin held traditional marathon
1 The Army and the Society. Moscow: All-Russia Public Opinion Research Center (ARPORC), 26.12.2018. URL: https://wciom.ru/fileadmin/file/reports_conferences/2018/2018-12-24_army_ society. pdf (date of reference: 02.04.2019).
2 Khamrayev V. Prosperity is More Important than Greatness // The Kommersant daily. November 6, 2018. (Issue No.203). p. 3.
3 Approval of the State Armament Program is Being "Finalized" - Peskov. 10.01.2018. URL: https://www.militarynews.ru/story.asp?rid=1&nid=470872&lang=RU (date of reference: 12.01.2018); The Visit to the Ufa Engine-Building Plant. Ufa, 24.01.2018. URL: http://www.kremlin.ru/ events/president/news/56697 (date of reference: 25.01.2018).
4 According to the report of T. Schevtsova, Deputy Defense Minister at her meeting with journalists on December 29, 2017. URL: https://function.mil.ru/news_page/country/more.htm?id=12156812@ egNews (date of reference: 12.02.2018).
5 Sergei Shoigu, Defense Minister and General of the Army held a telephone conference with the high command of the Armed Forces Moscow, 20.03.2018. URL: https://function.mil.ru/news_page/country/ more.htm?id=12167511@egNews (date of reference: 20.03.2018).
sessions of meetings on the various aspects of implementation of the SAP and development of the military and industrial complex. The only meeting of the Military Industrial Commission under the chairmanship of President Vladimir Putin was held in September. The key issue of that meeting was the beginning of formation of the perspective SAP in 2023-20321. At the beginning of the current year, the activities of the Military Industrial Commission were reduced to holding of a collegium chaired by Vice Premier Dmitri Rogozin2.
The practice of holding for the general public of the so-called Single Days of Acceptance of Military Equipment at the National Defense Control Center - this practice existed since July 2014 - was suspended in autumn 2018. It can be explained by the transfer of Yu. Borisov, initiator of this practice from the Ministry of Defense to the Government.
According to Sergei Shoigu, Defense Minister, all the activities envisaged by the SDO of 2018 were accomplished, while "as regards some items, such as aircraft and helicopters, target indicators were approached".3 The target indicators were partially revealed by President Vladimir Putin on May 17 at the meeting with the top officials of the Ministry of Defense and senior executives of enterprises of the military and industrial complex (MIC) in Sochi: "... the Armed Forces should receive over 160 units of aviation equipment, 10 surface warships and 14 space complexes. The armory of general-purpose forces is expected to be completed with 500 units of rocket and missile artillery ordance, tanks and armored vehicles".4
According to the data of the Ministry of Defense, in 2018 the Armed Forces actually received 126 modern aircraft and helicopters (79 percent of the target plan), 9 spacecraft (64 percent of the target plan), over 300 units of armament of armored force vehicles and equipment and over 120 units of weapon ordance (over 88 percent of the target plan).5 The Navy received 9 surface warships (90 percent of the plan)6. It was officially confirmed that deliveries of two Proton missiles and three Il-76MD-90A cargo aircraft were failed by the Krunichev Plant and the Ulyanovsk Aircraft Plant, respectively.
Within a year, equipment with modern samples increased in the strategic nuclear forces by 3 percentage point to 82 percent (19 percentage point a year before), the
1 The meeting of the Military and Industrial Commission. Kubinka, September 19, 2018. URL: http://www.kremlin.ru/events/president/news/58596 (date of reference: 19.09.2018).
2 Collegium of the Military and Industrial Complex discussed the development of the Navy's infrastructure. Moscow, 23.02.2018. URL: https://www.militarynews.ru/story.asp? rid=1&nid= 471863&lang=RU (date of reference: 23.01.2018).
3 See: The meeting of the Collegium of the Ministry of Defense.
4 The meeting of the top officials of the Ministry of Defense and top executives of enterprises of the military and industrial complex. Sochi, 17.05.2018. URL: http://www.kremlin.ru/events / president/news/57483 (date of reference: 18.05.2018).
5 See: The meeting of the Collegium of the Ministry of Defense; Avdeyev Yu. The Implementation of the state defense order in figures and facts // The Krasnaya Zvezda. December 19, 2018. (Issue No.142). 6p. 7.
6 Lurie E. Simple Arithmetic: The Way Shipbuilders Implement by 100 Percent the State Defense Order. URL: https://flotprom.ru/2018/HTornroga5/ (date of reference: 28.12.2018).
aerospace forces - by 1 percentage point to 74 percent (7 percentage point in 2017), the Navy - by 8.3 percentage point to 62.3 percent (6 percentage point a year before) and the ground forces - by 3.6 percentage point to 48.3 percent (2.7 percentage point in 2017)1.
Generally, by the end of 2018 the equipment of the Armed Forces with modern weapons was equal to 61.5 percent, with the target plan of 62 percent declared for two years in succession, having increased within a year by 2 percentage point (80 percent of the target plan). It is noteworthy that in 2018 the main target indicator of the SAP -equipment of the Armed Forces with modern weapons-conformed much better the relevant components and indicators of actual implementation of the SAP than a year before. In last year's failure situation, it is believed the country's leadership made the correct decision by demonstrating the latest state-of-the-art developments of the military and industrial complex to Russian citizens and foreign observers on March 1.
In 2018, the efficiency of utilization of financial resources for implementation of the SAP improved, but is still unacceptably low (see Table 30). The observed considerable reduction of the volume of the SDO was caused by the return of loans in 2014 and 2015; the assessment thereof is presented in Table 36. A 5.1 percent increase (planned by the Ministry of Industry and Trade) in the output of the military and industrial complex in 2018 may turn out to be too optimistic because the indices of the physical volume of the gross added value were as follows this year: "manufacturing of computers and electronic and optical products" (98.7 percent), "manufacturing of machines and equipment which are not included in other groups" (99.3 percent) and "manufacturing of other transport vehicles and equipment" (the mere 96.9 percent)2.
Table 30
The efficiency of utilization of financial resources for implementation
of the SAP in 2010-2018
2010 2011 2012 2013 2014 2015 2016 2017 2018
SDO with taking into account utilization and repayment of loans, billion rubles 509.1 707.6 888.3 1 283.0 1 676.2 1 767.1 2 100.6 1 468.6 1 297.4
SDO increase, % on previous year 1.8 39.0 25.5 44.4 30.6 5.4 18.9 -30.1 -11.7
Growth in output of military and industrial complex, % on previous year 17.4 5.8 6.4 13.5 15.5 12.9 9.5 5.3 5.1
Equipment with modern samples, % 12.0 14.0 16.0 19.0 30.0 47.2 58.3 59.5 61.5
Equipment growth, percentage point 3.0 2.0 2.0 3.0 11.0 17.2 11.1 1.2 2.0
Unit costs, billion rubles/ percentage point of equipment growth 169.7 353.8 444.2 427.7 152.4 102.7 189.7 1 223.8 648.7
Source: Federal Laws on Budget Ac ministration; the Federal Treasury; the Ministry of Industry and
Trade; the Ministry of Defense and own calculations.
1 See: The meeting of the Collegium of the Ministry of Defense.
2 The indices of the physical volume of the gross value added by the sector of the economy. Moscow: The Rosstat, 02.04.2019. URL: http://www.gks.ru/free_doc/new_site/vvp/vvp-god/tab12a-2.xls (date of reference: 03.04.2019).
6.7.3. The military and financial policy
In compliance with the existing practice, the administration of the 2018 federal budget was accompanied by two adjustments in July and November.1 The allocations on "the National Defense" established originally by the Law on the 2018 Federal Budget in the amount of RUB 2,769 trillion2, a decrease of RUB 84 billion (2.9 percent) as compared to the actual expenditures on this budget item in 2017 were increased by RUB 28 billion (1.0 percent) to RUB 2,797 trillion and RUB 31 billion (1.1 percent) to RUB 2,828 trillion (2.7 percent of GDP) in July and November, respectively. At the same time, the redistribution of allocations within this budget item on R&D of weapons and military equipment (WME) within the frameworks of the State Defense Order in order to implement the SAP by the end of the year were increased by RUB 12 billion by means of allocations on delivery and maintenance of the WME for the same purpose.
The abovementioned amounts of military allocations which are not specified in the published laws were received from the materials of subsequent draft laws on amendment of the federal budget. In 2018, the classified executed federal budget expenditures decreased somewhat (see Table 31) and amounted to RUB 2,794 trillion (2.7percent of GDP), a decrease of RUB 39billion as compared to 2017.
Table 31
The share of classified federal budget expenditures in 2009-2018, %
Code and name of section (subsection) with classified expenditures 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1 2 3 4 5 6 7 8 9 10 11
Total federal budget expenditures 10.1 10.5 11.7 11.6 13.8 14.9 19.1 21.7 17.3 16.7
0100 FEDERAL ISSUES 5.6 5.9 10.4 11.4 10.1 10.1 15.1 12.5 14.6 15.2
0108 International relations and international cooperation - - - - <0.1 1.4 24.1 23.1 26.5 24.9
0109 State material reserve 84.6 83.9 85.6 86.5 86.1 86.7 87.2 84.1 86.8 87.2
0110 Fundamental research 0.7 0.2 0.5 0.8 0.7 0.8 0.8 0.8 0.6 0.9
0112 Applied research in field of federal issues - - - 0.3 0.3 0.8 0.7 - - 48.2
0114 Other federal issues 1.9 1.9 1.7 1.6 3.6 5.1 5.3 3.4 4.4 3.9
0200 NATIONAL DEFENSE 47.7 46.5 45.4 47.5 50.4 56.0 65.4 70.5 63.9 65.1
0201 Armed Forces of Russian Federation 39.2 37.8 39.3 40.7 46.7 52.0 65.3 69.0 60.5 59.9
0204 Mobilization preparation of economy 100 100 100 100 100 100 100 100 100 100
0206 Nuclear weapons complex 100 100 100 100 100 100 100 100 100 100
0207 Implementation of international obligations in area of military and technical cooperation 100 100 100 61.6 80.6 76.7 80.8 77.6 76.9 83.6
1 Federal Law No.362-FZ of December 05, 2017 "On the 2018 Federal Budget and the 2019-2020 Planned Period"; Federal Law No.193-FZ of July 03, 2018 "On Amendment of the Federal Law "On the 2018 Federal Budget and the 2019-2020 Planned Period""; Federal Law No.458-FZ of November 29, 2018 "On Amendment of Federal Law "On the 2018 Federal Budget and the 2019-2020 Planned 2Period"".
2 The Conclusion of the Accounts Chamber on the Federal Draft Law "On Amendment of the Federal Law " On the 2018 Federal Budget and the 2019-2020 Planned Period"" approved by Resolution No. 31K(1252) of June 01, 2018 of the Collegium of the Accounts Chamber. p.15.
Cont'd
1 2 3 4 5 6 7 8 9 10 11
0208 Applied research in field of national defense 92.9 91.7 92.4 92.9 94.3 92.1 91.7 96.3 95.7 95.1
0209 Other issues of national defense 37.1 48.0 35.0 48.6 34.6 46.9 38.8 41.8 55.6 65.8
0300 NATIONAL SECURITY AND LAW ENFORCEMENT 31.0 31.5 31.6 24.0 26.6 27.1 28.4 29.1 29.4 28.2
0302 Law enforcement agencies 3.7 4.2 3.9 3.3 3.8 3.9 4.9 5.8 5.8 5.6
0303 Interior troops 8.2 8.2 7.4 4.6 4.4 5.3 6.9 - - -
0303 National guard troops - - - - - - - 7.7 7.0 5.6
0304 Judicial authorities - - - - - - - 3.2 3.4 3.9
0306 Security agencies 99.6 99.6 99.6 99.7 99.8 99.8 99.8 99.8 99.8 99.8
0307 Frontier service agencies 99.5 98.6 99.2 99.1 99.6 99.9 100 100 100 100
0309 Protection of population and territory from natural and man-made emergency situations, civil defense 50.0 48.6 44.5 41.6 38.5 39.1 39.7 45.7 49.1 30.6
0310 Migration policy - - - - - - - - 0.1 -
0313 Applied research in field of national security and law enforcement 75.0 91.4 86.6 86.6 82.5 82.7 91.2 90.5 92.4 91.0
0314 Other issues of national security and law enforcement 60.6 49.9 12.4 12.1 11.8 44.8 60.7 59.3 58.2 60.9
0400 NATIONAL ECONOMY 0.8 1.4 1.9 2.5 4.7 3.6 5.5 7.0 9.5 6.7
0403Research and use of space - - - - - - - - 56.3 -
0408Transport - - - - 0.1 - 0.2 - - -
0410Communications and IT - - - <0.1 1.8 2.0 0.5 - - -
0411 Applied research in field of national economy 4.5 5.4 11.9 15.3 18.3 23.8 26.7 14.2 17.6 14.4
0412 Other issues in field of national economy 0.9 2.9 2.2 2.5 9.4 2.9 8.0 17.3 18.2 16.1
0500 HOUSING AND PUBLIC UTILITIES 9.5 15.0 13.8 6.7 9.1 9.7 4.3 7.8 1.4 0.3
0501 Housing services 11.4 19.1 20.2 8.6 16.8 25.0 12.0 22.3 7.7 1.8
0700 EDUCATION 2.9 3.2 4.0 3.3 3.8 4.1 3.3 3.1 3.1 2.8
0701 Pre-school education 3.6 3.5 3.7 3.2 0.7 0.8 1.2 7.2 6.8 2.2
0702 General education 2.9 2.7 0.7 0.3 0.5 1.1 1.0 0.6 0.8 0.8
0704 Secondary vocational education 0.2 - - - - - - - - -
0705 Vocational training, retraining and advanced training 2.6 11.8 18.1 11.3 4.5 2.8 2.9 3.4 2.5 3.1
0706 Higher and post-graduate vocational education 3.4 3.6 5.0 4.1 4.9 5.1 3.9 3.6 3.7 3.6
0709 Other issues of education 0.6 0.5 0.3 0.4 0.5 0.9 1.2 0.9 - -
0800 CULTURE. CINEMATOGRAPHY AND MASS MEDIA 0.2 0.2 - - - - - - - -
0800 CULTURE. CINEMATOGRAPHY - - 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2
0801 Culture 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
0804 Printed media 3.1 3.3 - - - - - - - -
0900 HEALTHCARE. PHYSICAL CULTURE AND SPORTS 2.9 2.8 - - - - - - - -
0900 HEALTHCARE - - 2.4 2.1 2.8 2.6 2.6 2.9 3.4 3.0
0901 In-patient care 1.9 1.8 2.1 1.5 2.3 1.6 1.7 1.9 3.3 3.7
0902 Out-patient care 3.6 4.6 2.3 2.3 3.3 3.0 2.6 3.3 2.7 2.5
0905 Spa and recreation care 14.7 11.0 10.0 10.6 12.3 14.6 15.3 16.1 17.1 16.8
0907 Sanitary and epidemiological welfare 0.2 0.5 0.6 0.7 0.7 0.6 0.7 0.7 0.7 0.5
0908 Physical culture and sports 0.6 0.8 - - - - - - - -
0908 Applied research in healthcare - - - - - - - - - 0.2
0909 Other issues of healthcare - - 0.4 0.3 0.4 0.6 0.4 0.5 0.7 0.5
0910 Other issues of healthcare. physical culture and sports 1.2 0.9 - - - - - - - -
1000 SOCIAL POLICY <0.1 - - 0.1 0.1 <0.1 0.1 0.1 0.1 0.2
1001 Pension coverage - - - - - - 0.1 0.1 0.1 0.1
1003 Social security of population <0.1 - - 0.3 0.4 0.1 0.2 0.3 0.4 0.4
1004 Family and childhood welfare - - - - <0.1 <0.1 <0.1 <0.1 <0.1 <0.1
Cont'd
1 2 3 4 5 6 7 8 9 10 11
1100 PHYSICAL CULTURE AND SPORTS - - 0.2 0.3 0.3 0.3 0.2 0.3 0.2 0.4
1101 Physical culture - - 62.0 4.9 6.9 7.6 3.8 3.6 5.2 5.7
1200 MASS MEDIA - - 0.2 0.2 0.4 0.4 0.3 2.2 0.3 0.3
1202 Printed media - - 2.9 3.1 5.0 5.4 4.5 5.1 5.4 5.3
1204 Other issues in field of mass media - - - - - - - 12.9 - -
Source: As regards the data on 2009-2017, laws on administration of the federal budget were used; as regards the data on 2018 - quarterly reports of the Federal Treasury on administration of federal and consolidated budgets as of January 01, 2019; the data on 2009-2010 are provided to relevant sections and subsections of the budget classification of expenditures which became effective since 2011; The data on the earlier budget classification are shown in italics; own calculations.
The absolute and relative values of the main components of direct military expenditures of the Russian Federation in the 2018 Federal Budget and the change thereof as compared to 2017 in nominal terms1 determined on the basis of the Federal Treasury's monthly reports on administration of the consolidated and federal budgets in December 2018 are shown in Table 32.
Table 32
Direct military federal budget expenditures on the "National Defense"
item in 2018
Name of section and subsections Amount of expenditures, million rubles Change on 2017, million rubles (growth, %) Share of expenditures, % (change on 2017, percentage point)
In 2018 federal budget In GDP
1 2 3 4 5
NATIONAL DEFENSE 2 827 015 -25 260 (-0.89) 16.92 (-0.46) 2.72 (-0.38)
Armed Forces of Russian Federation 2 163 059 -56 016 (-2.52) 12.94 (-0.57) 2.08 (-0.33)
Mobilization and pre-conscription and reserve military training 7 128 493 (7.43) 0.04 (-) 0.01 (-)
Mobilization preparation of economy 3 175 176 (-5.25) 0.02 (-) <0.01 (-)
Nuclear-weapons complex 45 117 680 (1,53) 0,27 (-) 0,04 (-0,01)
Implementation of international obligations in field of military and technical cooperation 10 087 1 264 (14.32) 0.06 (0.01) 0.01 (-)
Applied research in national defense 324 861 54 362 (20.10) 1.94 (0.30) 0.31 (0.02)
Other issues of national defense 273 588 -25 866 (-8.64) 1.64 (-0.19) 0.26 (-0.06)
Source: The Federal Treasury; own calculations.
In 2018, the expenditures on the "National Defense" budget item were carried out with the saving of RUB 1 billion as compared to the final version of the law on the federal budget. At the same time, on the back of saving RUB 56 million worth of expenditures on the "Other Issues of National Defense" item excess expenditures were made on the "Armed Forces of the Russian Federation" item in the amount of RUB 41 billion, of which 50 percent is related to the delivery and maintenance of the WME within the frameworks of the State Defense Order (SDO) and RUB 14 billion on the "Applied Research in National Defense" item for research in the field of the WME within the frameworks of the SDO.
1 Federal Law No.345-FZ of October 11, 2018 "On Administration of the 2017 Federal Budget".
It is noteworthy that RUB 205 billion which were unutilized in 2017 and carried forward to 2018 by decision of the President of the Russian Federation surpassed by large the limit of the expenditures of the consolidated budget breakdown as compared to the allocations envisaged by the law on the federal budget as regards the "National Defense" item within the entire year starting from RUB 184 billion to RUB 235 billion in December. However, in 2018 those considerable financial resources were not utilized because of the existing risks in the Ministry of Defense of renewed growth in accounts receivables on advance payments which decreased for the first time a year before by 0.8 percent to RUB 2,864 trillion (as much as two annual volumes of the SDO). Later in November, the RF Minister of Defense declared that the issue of overadvancing of the military and industrial complex for nearly RUB 400 billion was solved.1
Military expenditures in other items of the federal budget are listed in Table 33. The general reduction of RUB 5 billion in military expenditures was caused by substantial reduction (RUB 74 billion) in the "National Defense" item's classified expenditures which compensated evident growth of RUB 34 billion (74 percent) in the expenditures of the Ministry of Defense on the "Housing and Public Utilities" item. A substantial relative increase in expenditures on the "Elimination of Chemical Weapons in the Russian Federation" Presidential Program is related to the activities aimed at completing that program in 2018.
Table 33
Direct and indirect military spending under other sections of federal budget, 2018
Name of subsection, target item or type of expenditures Total expenditure million RUB Change on 2017, million rubles (growth, %) Expenditure (% change over 2017 percentage point)
Federal budget 2018 as a percentage of GDP
1 2 3 4 5
"National Matters"
Expenditures of Ministry of Defense 8 -1 (-15.80) <0.01 (-) <0.01 (-)
Mobilizational preparation of government agencies 109 6 (-) <0.01 (-) <0.01 (-)
"National Security and Law Enforcement"
Federal National Guard 228 438 5 850 (2.63) 1.37 (0.01) 0.22 (-0.02)
Frontier service authorities 136 867 -3 518 (-2.51) 0.82 (-0.04) 0.13 (-0.02)
Mobilizational preparation of government agencies 16 -6 (-27.91) <0.01 (-) <0.01 (-)
"National Economy"
Mobilizational preparation of government agencies 182 58 (46.63) <0.01 (-) <0.01 (-)
"Destruction of Chemical Weapons Stockpiles in Russian Federation" Presidential Program 434 86(24.65) <0.01 (-) <0.01 (-)
Subsidies on Russia-NATO coordination center 18 -1 (-5.04) <0.01 (-) <0.01 (-)
1 The Ministry of Defense controls 3,500 contracts of the State Defense Order up to each aircraft. Moscow, 30.11.2018. URL: https://function.mil.ru/news_page/country/more.htm?id=12206217@ egNews (date of reference: 30.11.2018).
Cont'd
1 2 3 4 5
Federal Target Program "Industrial
Utilization of Arms and Military Equipment in 2011-2015 and in the 49 3б (277.50) <0.01 (-) <0.01 (-)
period till 2020"
Capital development within frameworks of SDO 7 520 549 (7.88) 0.04 (-) 0.01 (-)
Contributions to charter capitals and subsidies to MIC 10 013 5 745 (134.б1) 0.0б (0.03) <0.01 (0.01)
Classified expenditures 1б0 221 -73 898 (-31.5б) 0.9б (-0.47) 0.15 (-0.10)
"Housing and Public Utilities"
Expenditures of Ministry of Defense 79 72б 33 797 (73.59) 0.48 (0.20) 0.08 (0.03)
Expenditures of Federal National Guard 2 801 518 (22.б8) 0.02 (-) <0.01 (-)
"Destruction of Chemical Weapons
Stockpiles in Russian Federation" 2б1 259 (12341.59) <0.01 (-) <0.01 (-)
Presidential Program
Mobilizational preparation of government agencies 13 13 (-) <0.01 (-) <0.01 (-)
Environmental Protection
Expenditures of Ministry of Defense 1 525 113 (7,99) 0,01 (-) <0,01 (-)
"Education"
Expenditures of Ministry of Defense 80 578 б 801 (9.22) 0.48 (0.03) 0.08 (-)
Expenditures of Federal National Guard 5 б44 8б3 (18.04) 0.03 (-) 0.01 (-)
Presidential program 'Destruction of Chemical Weapons Stockpiles in RF' 90 90 (-) <0,01 (-) <0,01 (-)
"Culture and Cinematography"
Expenditures of Ministry of Defense 3 921 1б0 (4.2б) 0.02 (-) <0.01 (-)
Expenditures of Federal National Guard 377 102 (37.22) <0.01 (-) <0.01 (-)
"Healthcare"
Expenditures of Ministry of Defense 72 019 13 322 (22,70) 0,43 (0,07) 0,07 (0,01)
Expenditures of Federal National Guard 4 838 4б3 (10,59) 0,03 (-) <0,01 (-)
Pharmacological support ZATO Federal Biomedical Agency 91 -4 (-4.07) <0.01 (-) <0.01 (-)
Mobilizational preparation of government agencies 11 4 (б5.75) <0.01 (-) <0.01 (-)
"Social Policy"
Expenditures of Ministry of Defense 490 б93 2 899 (0.59) 2.94 (-0.03) 0.47 (-0.0б)
Expenditures of Federal National Guard and Frontier Service Authorities 75 297 3 392 (4.72) 0.45 (0.01) 0.07(-0.01)
Material support of experts of nuclear weapons complex of Russian Federation 7 34б 20 (0.27) 0.04 (-) 0.01 (-)
Benefits to families of killed servicemen
and servicemen who became disabled as 11 241 -3 093 (-21.58) 0.07 (-0.02) 0.01 (-)
result of military injuries
Lump-sum benefits to pregnant wives of
servicemen who are on compulsory-duty service, as well as monthly child 803 -123 (-13.2б) <0.01 (-) <0.01 (-)
benefits
Resettlement of citizens from closed administrative territorial units (CATU) 509 б2 (13,90) <0.01 (-) <0.01 (-)
Mobilizational preparation of government agencies 8 2 (27.80) <0.01 (-) <0.01 (-)
"Physical Fitness and Sports"
Expenditures of Ministry of Defense 3 792 75 (2.02) 0.02 (-) <0.01 (-)
"Mass Media"
Expenditures of Ministry of Defense 2 810 505 (21.90) 0.02 (-) <0.01 (-)
Mobilizational preparation government agencies 4 <1 (-4.74) <0.01 (-) <0.01 (-)
"General Intergovernmental Transfers Within the Budget System of the Russian Federation"
Subsidies to CATU budgets 9 151 -298 (-3.1б) 0.05 (-) 0.01 (-)
TOTAL ON OTHER ITEMS 1 397 427 -5 157 (-0.41) 8.3б (-0.18) 1.35 (-0.17)
Source: The Federal Treasury; own calculations.
As a result, in 2018 the overall military expenditures (see Table 34) of the Russian federal budget calculated in accordance with the UN standards applicable to military expenditures decreased by 0.5 percentage point of GDP to 4.1 percent of GDP as compared to the previous year.
Table 34
The overall indices of military and related federal budget expenditures in 2018
Name of expenditures Amount of expenditures, million rubles Change on 2017, million rubles (growth, %) Share of expenditures, % (change on 2017, percentage point)
In 2018 federal budget In GDP
Overall military expenditures related to present and previous military activities 4 224 442 -30 416 (-0.79) 25.28 (-0.64) 4.07 (-0.55)
Overall expenditures by items "National Defense" and "National Security and Law Enforcement" 4 798 598 28 304 (0.65) 28.71 (-0.34) 4.62 (-0.56)
Source: The Federal Treasury, own calculations.
In 2018, the peak of expenditures on the "National Defense" item in Q4 (31.7 percent or RUB 898 billion) decreased substantially as compared to the previous year (36.9 percent or RUB 1.54 trillion). The quarterly dynamics of execution of expenditures by the main subsections of the "National Defense" item of the federal budget in 2016-2018 are shown in Fig. 28-30.
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Fig. 28. The execution of federal budget expenditures by the "Armed Forces of the Russian Federation" subsection in 2016-2018
Source: The Federal Treasury; own calculations.
70% 60% 50% 40% 30% 20% 10% 0%
Source: The Federal Treasury; own calculations.
Fig. 29. The execution of federal budget expenditures by the "Applied Research in National Defense" subsection in 2016-2018
50% 45%
Source: The Accounts Chamber; own calculations.
Fig. 30. The execution of federal budget expenditures by the "Other Issues of National Defense" subsection in 2016-2018.
In 2018, the expenditures on allowances to servicemen of the Ministry of Defense amounted to RUB 506,481 billion (0.49 percent of GDP), an increase of 3.4 percent in nominal terms within a year. The expenditures on labor remuneration of the civilian personnel of the Ministry of Defense amounted to RUB 209,934 billion (0.20 percent of GDP), an increase of 5.8 percent in nominal terms for the first time since 2013. In 2018 the expenditures on pensions to servicemen of the Ministry of Defense of the Russian Federation amounted to 343,282 billion (0.33 percent of GDP), an increase of 1.5 percent in nominal terms as compared to the previous year.
The main indicators of the federal budget expenditures on the manning of the Armed Forces in 2011-2018 are shown in Table 35. The expenditures of the Ministry of Defense are considered here in a package with the expenditures on allowances to servicemen and civilian personnel in terms of the expenditures on the manning of the Armed Forces with servicemen in the previous periods.
Table 35
Federal budget expenditures on the manning of the Armed Forces in 2011-2018
Type of expenditures 2011 2012 2013 2014 2015 2016 2017 2018
In nominal terms, billion rubles
Payments to servicemen 262.0 352.7 379.4 400.7 429.8 473.5 489.9 506.5
Payments to civilian personnel n/a 189.2 213.2 211.3 203.7 199.0 198.4 209.9
Pensions of Ministry of Defense 136.4 252.6 262.6 287.4 305.3 327.1 338.3 343.3
% of GDP
Payments to servicemen 0.44 0.53 0.53 0.51 0.53 0.55 0.53 0.49
Payments to civilian personnel n/a 0.28 0.30 0.27 0.25 0.23 0.22 0.20
Pensions of Ministry of Defense 0.23 0.38 0.37 0.37 0.38 0.38 0.37 0.33
% ex penditures on "National Defense" item
Payments to servicemen 17.3 19.5 18.0 16.2 13.5 12.5 17.2 17.9
Payments to civilian personnel n/a 10.4 10.1 8.5 6.4 5.3 7.0 7.4
Pensions of Ministry of Defense 9.0 13.9 12.5 11.6 9.6 8.7 11.9 12.1
Growth within year in nominal terms, %
Payments to servicemen - 34.6 7.6 5.6 7.3 7.5 3.5 3.4
Payments to civilian personnel - n/a 12.7 -0.9 -3.6 -2.3 -0.3 5.8
Pensions of Ministry of Defense - 85.3 3.9 9.5 6.2 7.1 3.4 1.5
Source: The Federal Treasury; own ca
culations.
The data presented in Table 35 point to the fact that in 2018 despite an increase in nominal terms in cash allowances and pensions of the Ministry of Defense the Government managed to reduce at least a portion of the expenditures on the manning of the Armed Forces in real terms, which situation can be explained by insignificant growth in the number of servicemen in combination with the reduction of the number of military pensioners.
In 2018, the expenditures of the Ministry of Defense on fuels and lubricants and material support decreased again as compared to the previous year and amounted to RUB 59,020 billion (-19.2 percent) and RUB 24,792 billion (-9.0 percent), respectively. The expenditures on subsistence support grew by 14.9 percent to RUB 73,952 billion.
In 2018 the budget investments of the Ministry of Defense in capital development projects within the frameworks of the SDO and subsidies on purchasing of housing by individuals decreased as compared to the previous year and amounted to RUB 82,404 billion (-32.4 percent) and RUB 129,032 billion (-1.8 percent), respectively. The capital development plans of the Ministry of Defense envisaged spending of RUB 117,093.9 billion, including RUB 93.9 billion on building of special and military projects1.
1 A meeting of the Collegium of the Ministry of Defense of the Russian Federation was held in Moscow. Moscow, 26.02.2018. URL: https://function.mil.ru/news_page/country/more.htm?id=12164444@eg News (date of reference: 26.02.2018).
Presented in Table 36 is the updated and adjusted estimate of the contribution of credit financing to Russian military expenditures in 2011-2018 based on the data of the Accounts Chamber on the actual utilization of state guarantees for the financing of the SDO, as well as the published data on repayment of commercial loans. To calculate the interests (a banking premium), the adjusted value of the officially declared markup to the Central Bank's rate of refinancing (the key rate) was used. The overall contribution of the lending scheme for each year is determined as the difference between the utilized guarantees and the body of the debt.
Table 36
The contribution of credit financing to Russian military expenditures
in 2011-2018
2011 2012 2013 2014 2015 2016 2017 2018 2011-2018
Utilized guarantees, billion rubles 123.2 187.7 350.5 470.9 8.5 200.8 - - 1 341.6
Repayment of loans, billion rubles, including: - - - - 181.5 792.0 186.8 477.0 1 637.2
Return of body of debt, billion rubles - - - - 123.2 578.5 132.4 306.7 1 140.8
Repayment of interests, billion rubles - - - - 58.3 213.5 54.4 170.2 496.4
Overall contribution of lending scheme, billion rubles +123.3 +187.7 +350.5 +470.9 -114.7 -377.6 -132.4 -306.7 -
Overall contribution of lending scheme, % of GDP +0.20 +0.28 +0.48 +0.59 -0.14 -0.44 -0.14 -0.30 -
Source: The Accounts Chamber; the Ministry of Defense; the Vedomosti daily. December 14, 2016. (No. 235); own calculations.
Presented in Table 37 are the Russian military expenditures in 2008-2018 accounted for in the overall balanced expenditures on the "National Defense" item of the consolidated budgets of the subjects of the Russian Federation in 2018 in the amount of RUB 1,394 billion and the contribution of credit financing in 2011-2018 in accordance with the data of Table 36.
Таблица 37
The main indicators of military expenditures of the Russian Federation in 2008-2018
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1 2 3 4 5 6 7 8 9 10 11 12
1. In nominal terms (in current prices), billion rubles
Federal Budget allocations on "National Defense" item: in current budget classification 1 031.6 1 192.9 1 278.0 1 537.4 1 846.3 2 111.7 2 470.6 3 163.8 3 895.4 3 049.8 2 827.9
Execution of federal budget expenditures on "National Defense" item in current budget classification a 1 040.8 1 188.2 1 276.5 1 516.0 1 812.3 2 103.6 2 479.1 3 181.4 3 775.3 2 852.3 2 827.0
Military expenditures of Russian Federation in accordance with data provided to UN b 1 118.0 1 166.1 1 162.5 1 423.3 1 689.3 1 660.1 1 962.1 2 903.3 2 055.7 n/a n/a
Overall military expenditures related to current and previous military activities c 1 448.8 1 748.7 1 880.3 2 267.1 2 841.9 3 344.0 3 928.8 4 197.6 4 535.4 4 124.4 3 919.1
2. In real terms (in prices of 2018) d, billion rubles
Federal budget allocations on "National Defense" item: in current budget classification 2 220.5 2 517.5 2 362.1 2 451.5 2 698.7 2 928.3 3 186.9 3 793.3 4 526.8 3 363.9 2 827.9
Cont'd
1 2 3 4 5 6 7 8 9 10 11 12
Execution of federal budget expenditures on "National Defense" item in current budget classification 2 240.5 2 507.6 2 359.3 2 417.2 2 649.1 2 917.0 3 197.9 3 814.4 4 387.3 3 146.0 2 827.0
Military expenditures of Russian Federation in accordance with data provided to UN 2 406.5 2 461.0 2 148.6 2 269.5 2 469.2 2 302.1 2 531.0 3 481.0 2 388.8 n/a n/a
Overall military expenditures related to current and previous military activities 3 118.5 3 690.5 3 475.4 3 614.9 4 154.1 4 637.1 5 067.9 5 032.8 5 270.5 4 459.0 3 919.1
3. In real terms (in prices of 2008) e, billion rubles
Federal Budget allocations on "National Defense" item: in current budget classification 1 031.6 1 169.5 1 097.4 1 138.9 1 253.7 1 360.4 1 480.5 1 762.2 2 103.0 1 562.7 1 313.7
Execution of federal budget expenditures on "National Defense" item in current budget classification 1 040.8 1 164.9 1 096.1 1 122.9 1 230.7 1 355.1 1 485.6 1 772.0 2 038.2 1 461.5 1 313.3
Military expenditures of Russian Federation in accordance with data provided to UN 1 118.0 1 143.3 998.2 1 054.3 1 147.1 1 069.5 1 175.8 1 617.2 1 109.0 n/a n/a
Overall military expenditures related to current and previous military activities 1 448.8 1 714.5 1 614.5 1 679.4 1 929.8 2 154.2 2 354.4 2 338.1 2 448.5 2 113.3 1 820.7
4. Military burdening of economy, % GDP
Federal budget allocations on "National Defense" item: in current budget classification 2. 50 3.07 2.76 2.55 2.71 2.89 3.13 3.81 4.53 3.31 2.72
Execution of federal budget expenditures on "National Defense" item in current budget classification 2.52 3.06 2.76 2.51 2.66 2.88 3.14 3.83 4.39 3.10 2.72
Military expenditures of Russian Federation in accordance with data provided to UN 2.71 3.00 2.51 2.36 2.48 2.27 2.48 3.49 2.39 n/a n/a
Overall military expenditures related to current and previous military activities 3.51 4.51 4.06 3.76 4.17 4.57 4.97 5.05 5.27 4.48 3.77
5. By purchasing power parity (in current prices), billion rubles
Federal Budget allocations on "National Defense" item: in current budget classification 71.9 85.1 80.8 88.6 100.0 108.7 117.6 134.1 159.9 125.3 108.5
Execution of federal budget expenditures on "National Defense" item in current budget classification 72.6 84.8 80.7 87.4 98.2 108.3 118.0 134.9 155.0 117.2 108.5
Military expenditures of Russian Federation in accordance with data provided to UN 78.0 83.2 73.5 82.1 91.5 85.5 93.4 123.1 84.4 n/a n/a
Overall military expenditures related to current and previous military activities 101.0 124.8 118.8 130.7 153.9 172.2 187.0 178.0 186.2 169.4 150.4
6. By average annual exchange rate (in current prices),billion rubles
Federal Budget allocations on "National Defense" item: in current budget classification 41.5 37.6 42.1 52.3 59.4 66.3 64.3 51.9 58.1 52.3 45.1
Execution of federal budget expenditures on "National Defense" item in current budget classification 41.9 37.5 42.0 51.6 58.3 66.1 64.5 52.2 56.3 48.9 45.1
Military expenditures of Russian Federation in accordance with data provided to UN 45.0 36.8 38.3 48.4 54.3 52.1 55.1 47.6 30.7 n/a n/a
Overall military expenditures related to current and previous military activities 58.3 55.1 61.9 77.1 91.4 105.0 102.3 68.9 67.8 70.6 62.5
For reference
Deflator of gross domestic product, % on previous year 118.0 102.0 114.2 115.9 109.1 105.4 107.5 107.6 103.2 105.4 110.3
Purchasing power parity, RUB/USD 14.34 14.02 15.82 17.35 18.46 19.42 21.01 23.59 24.36 24.34 26.06
USD/RUB exchange rate (average weighted), USD/RUB. 24.86 31.72 30.37 29.39 31.09 31.85 38.42 60.96 67.03 58.35 62.71
a As regards 2018 - the data of a monthly report of the Federal Treasury on execution of the consolidated budget in December 2017.
b As regards 2017, the data were not provided to the UN as a result of termination for unknown reasons of Resolution No.11 of January 9, 1994 of the Government of the Russian Federation "On Submission on the Annual Basis of the Data on Military Expenditures of the Russian Federation to the UN Secretary-General and the Information on the Military Budget of the Russian Federation to the Conference on Security and Cooperation in Europe".
c Including pensions to servicemen and expenditures on the elimination of stockpiles of chemical weapons and utilization of weapons and military equipment. 4 e Deflated by means of the GDP deflator.
Source: Federal Laws on Federal Budgets in 2008-2018 and Amendment of Federal Budgets in 20082017; United Nations Report on Military Expenditures; the Central Bank of the Russian Federation; the Rosstat; the Federal Treasury, OECD.Stat.
6.8. North caucasus in 2018: factors of changes1
This section deals with a brief evaluation of developments in the regions of North Caucasus in 2018 as they can be regarded as indicators of significant changes in that part of the country. Such developments include personnel changes in the government of Dagestan where for the first time in the post-Soviet period key positions in the region were taken by officials who never worked in that republic, as well as large-scale public activities in Ingushetia over the issue of the region's borders.
6.8.1. Dagestan: economic consequences of "Cleansing" of clan bureaucracy
In 2018, federal law enforcement units carried out "cleansing" of crony bureaucracy in Dagestan, an unprecedented act for North Caucasus. As a result, criminal cases were brought against the head of the region's government, two vice premiers, three ministers and heads of territorial authorities of a number of federal bodies in Dagestan. On the back of personnel changes which followed that "cleansing", in the region's governing bodies the share of executive officials who never worked in the republic before has grown. At present, such officials include Vladimir Vasiliev, Head of Dagestan (who became the acting head of the region four months before the initiation of criminal cases) and Artem Zdunov, Chairman of the Government (who was appointed after the arrest of his predecessor Abdusamad Gamidov in February 2018).
A large-scale attack on crony officials and emergence in the region's leadership of officials who were not involved in any groups of interests in the local bureaucracy gave rise to expectations of "the rules of the game" in the economy - such non-transparent rules which do not comply with the federal legislation were formed for decades of the "clan" rule in Dagestan - to be modified. After large-scale personnel changes in the region, it is too early to make conclusions on whether they were successful. However, it is worth analyzing the situation in those sectors of the regional economy where the issue of non-transparent mechanisms of regulation was earlier believed to be the most acute one.
Building
One of the first sectors where with a leadership change in the region new developments affected all the players was the building industry. Violations in housing development used to be one of the main issues Vladimir Vasiliev publicly referred to
1 This section was written by K. Kazenin, Gaidar Institute, RANEPA; I. Starodubrovskaya, Gaidar Institute, RANEPA.
from the very date he was appointed the head of the region. What is meant here is the practice of issuing illegally building permits and non-compliance with engineering standards in building of apartment houses. In addition, the region's leaders and new members of the government repeatedly criticized the state of things in production of building materials, particularly, bricks: it was specified that brick-making plants in the Republic used technologies which were dangerous to the environment and lots of such plants did not have any registration whatsoever. It is noteworthy that during the postSoviet period, housing development in Dagestan was one of the most viable sectors of the economy with a high level of competition between local businessmen and a widespread practice of informal relations between market participants (for example, a standard practice was a "barter" exchange of apartments in new houses for building materials supplied). According to market participants' numerous evidence, the practice of issuing building permit documents largely depended on informal relations between developers and state authorities; as a result of such a practice unjustified building permits were often issued.
As of the end of 2018, it can be stated that the situation in the building industry of Dagestan has largely modified since completion of personnel changes in the government. As a result, numerous building permits issued earlier were withdrawn. According to the information of the press office of the Head and the Government of Dagestan, as of November 2018 there were 384 apartment houses either already built or under construction whose permit documents were found illegal. At present, construction of most such buildings is suspended and the issue of their demolition is considered by courts of law. Also, according to the data of the government of Dagestan by the end of 2018 out of 60 brick-making plants operating in the Republic 44 plants stopped working because of noncompliance with ecological requirements. It means that effective prohibitive measures against illegal practices in building and production of building materials were implemented.
As of the date of preparation of this Review, no official data were available to receive a quantitative evaluation of the effect of the measures in question on the state of the building industry (it is to be noted that in 2018 the official statistical data of Dagestan are unlikely to make it feasible to produce any reliable evaluation because the official statistics on building in Dagestan in previous years - such data could be used for comparison purposes - are not regarded by experts as trustworthy). Market participants claim that in 2018 the volume of building in Dagestan decreased nearly by a half. At the round table meeting held in Makhachkala on December 181. businessmen said that such a reduction of the extent of building was related not only to the withdrawal of the existing building permits, but also the procedure for issuing new ones which became much more complicated. Also, local businessmen noted that building companies from other subjects of the Russian Federation won tenders held in the Republic.
1 Novoe Delo, December 19, 2018 URL: https://ndelo.ru/novosti/problemy-stroitelnoj-otrasli-dagestana-obsudili-na-kruglom-stole
So, as of the end of 2018 changes which took place in Dagestan' building industry largely facilitated solution of the existing deep-rooted legal problems, but failed to create conditions for growth or solid prospects for survival of local businesses. It is clear that the future of the building industry which experienced so far the effect of personnel changes in the government of the region more dramatically than other sectors of the economy will depend on the steps to be taken by Dagestan's leadership to create new business-friendly "rules of the game" instead of those denounced.
Land Relations
One of the Republic's specific issues, which Dagestan's new leadership has repeatedly declared its commitment to solve, is the legislative regulation of agricultural land utilization. What is primarily meant here is the distant-pasture cattle tending lands with the total area of over 1.5m ha. It is flatlands which used to be provided to mountain farms for cattle ranging. At present, the utilization of such lands is regulated by the Republic's special law under which lands are deemed the property of the Republic and rented out to agricultural sector enterprises. The key problems related to distant-pasture cattle tending lands include: firstly, a large number of spontaneous settlements on such lands where people from the mountains move to1 and, secondly, a highly nontransparent nature of lease relations and corrupt practices associated with them where large leaseholders who received distant-pasture cattle tending lands at their disposal at unjustifiably low prices subleased them unofficially to businessmen. These problems are recognized by Dagestan's new leaders, as well2.
It is possible to single out two major things which the new leadership of Dagestan has managed to achieve on distant-pasture cattle tending lands to change the situation for the better.
Firstly, the authorities are determined to carry out the inventory of such lands and analysis of the existing rent agreements. Such actions can be regarded as a preliminary step for taking a general decision on the status of those lands, which is infeasible to do without more accurate knowledge of the actual situation there. On the other side, it is to be remembered that Dagestan's authorities repeatedly declared their inventory plans in the previous years, too, however, no concrete decisions were made after the inventory stage.
Secondly, the initiatives from "the below" as regards distant-pasture cattle tending lands fail to receive support. In particular, the call by residents of the Nagaisky District of Dagestan for a district referendum to be held on the status of distant-pasture cattle tending lands was not supported3.
1 K.I. Kazenin. The Components of Caucasus: Land, Power and Ideology in the Republics of North Caucasus. Moscow: REGNUM, 2012. C.6-21.
2 Social Activists Advise the Minister to Carry Out the Land Reform. AiF Dagestan, May 15, 2018. URL: http: //www. dag .aif.ru/society/huzhe_chem_est_chego_hotela_kumykskaya_obshchestvennost_ ot_tolstikovoy
3 The authorities in Dagestan refused the Nogai to hold a referendum // Kavkazsky Uzel, September 8, 2018. URL: https://www.kavkaz-uzel.eu/articles/325135/
So, there is a situation where the authorities have recognized the existence of a deep-rooted problem in land relations, but do not publicly identify the ways of solving it, nor support the initiatives of the population on this issue. Assessing the prospects of the situation around distant-pasture cattle tending lands, experts warn that the issue in question is a source of risk for inter-ethnic relations in Dagestan and is constantly raised by public ethnical organizations1. If no concrete strategy is developed in respect of this problem, it may have adverse consequences for the region's socio-political situation.
6.8.2. The conflict process of establishing trans-regional borders
In 2018, the process of amendment of borders between subjects of the Federation in the North Caucasian Federal Okrug was initiated. It began on September 26 when the leaders of Ingushetia and Chechnya signed an agreement on the administrative border between the two republics. Early in 2019, a similar procedure was started between Chechnya and Dagestan. The process which was originally, by all accounts, perceived as a bureaucratic formality has resulted in a surge of protest activities in North Caucasus in the past few years. Social consequences of that decision were explicitly underestimated. The border issue has opened a Pandora's box: land disputes which seemed to have calmed down started anew2 and the hurt related to the loss by the Ingush of the Prigorodny District3 was refreshed again.
The information on road works from the side of Chechnya on the territories which in absence of the established border were deemed to be a part of Ingushetia stirred up the general public in Ingushetia even before the agreement was signed. At that time, the negotiations started between nongovernmental organizations on a joint preparation of the forum for discussion of the border issue. When it became known that the decision on the transfer to Chechnya of the territories which were perceived as original Ingush territories had been already taken behind-the-scenes without public consultations held and the general public being informed, a spontaneous meeting, which gathered at some points up to 100,000 persons was held in the Ingush capital of Magas. The meeting continued day and night for two weeks running.
Protest activities in Ingushetia can be characterized by the following:
1) smoothing of traditional "fault lines" in the Ingush society. The most vivid example was the fact that religious differences - both between different groups within the limits
1 A. Z., Adiev, R.A. Murzayev. The Ethno-Confessional Aspects of Land Conflicts in North Caucasus // Vlast, 2014. Vol. 22. No. 1. pp. 177-179.
2 In 2012-2013, there was a conflict between the leaders of the two republics over the Sunzha District of Ingushetia which was included by the Chechen legislation on borders of municipal districts into Chechnya.
3 Before the deportation of the Ingush in 1944, the Prigorodny District was a part of the Chechen-Ingush Autonomous Soviet Socialist Republic (ASSR); later it was transferred to North Osetia and remained a part of it after the return of the deported population. In 1992, a violent conflict took place there and the Ingush residents had to leave it. The consequences of that conflict have not been overcome till the present day.
of the traditional Sufi Islam and between the Sufi and the Salafits - were overcome during the protests. One of the most respected elders publicly apologized before the Salafit youth for unjust treatment in the past. During the meeting, religious-type rituals were held by imams of different Islamic trends. Also, various non-governmental organizations which earlier opposed one another consolidated in the face of the common threat and facilitated the organization of the protests. It is noteworthy that most law enforcement officers stood together with the protesters and performed Namaz (prayed) with them;
2) differentiation of the attitude to protests within the framework of traditional groups. So, some religious figures, including both the Sufi and the Salafits opposed meetings. In opposition to the opinion of their teips (groups of blood relatives), some representatives of the elite supported the agreement on the border, though they ran the risk of being expelled from their teips, a severe punishment in a conservative community. At the same time, there were divisions on this issue in the elite, too: some deputies and members of the Constitutional Court of the Republic opposed the approval of the agreement;
3) an active participation of the youth and women in protests, that is, the groups which normally have a subordinate position in the conservative community. But in those protests, they showed initiative, organized the meeting, participated in the negotiations and occupied key positions in information coverage of the developments. Along with the most respected elders and social activists, journalist Izabella Evlova became a symbolic figure of the protests;
4) a high level of organization of the meeting where spontaneous manifestations of the aggressive behavior were just single and no violent actions were observed. Leaders of the Ingush civil society whose community work earned them a great reputation managed to keep the spontaneous public protest under control and prevent it from becoming radicalized. During the meeting, there were moments when the situation could get out of control, but they managed to prevent it, though more radical groups, which disagreed with the moderate course adopted by the protest leaders, left the meeting;
5) no violent crackdown by the authorities on the protest; only targeted reprisals against protest leaders. Unlike other regions, the Ingush authorities were more tolerant to protesters. It can probably be explained by the fact that those were mass protests with participation of the older generation and women, the regional elite was split on this issue and local law enforcement officers explicitly supported the protests. Two days later, the meeting was approved by the authorities. In their turn, the protesters met the authorities halfway and agreed to change the place of the meeting. After the expiry of the agreed upon term of the meeting, the protesters left. However, it does not mean that the authorities completely gave up the idea of exerting pressure on protest organizers. Several persons were dismissed for far-fetched reasons from prestigious jobs (in Ingushetia where the number of jobs is limited a person who was dismissed may face serious problems). Also, protest activists were subjected to pressure from law enforcement agencies, particularly, the Center for Prevention of Extremism.
Nongovernmental organizations which actively took part in the protests fear to be closed down by the authorities; some of them experience problems with renting premises.
After the meeting was over, the protest assumed an institutionalized form. Despite the fact that on December 6 the Constitutional Court of the Russian Federation found the agreement on borders compatible with the Constitution of the Russian Federation, protest organizers were going to continue their campaign to secure a fair decision via utilization, both of international legal norms and provisions of the traditional law which was in effect in the territories of Ingushetia and Chechnya. However, the decision of the Constitutional Court of the Russian Federation caused a great disappointment in the Ingush society. Social activities started to decline.
Can one say that the situation in Ingushetia has stabilized and does not entail any risks? Actually, the most likely scenario is as follows: having failed to produce positive results, the mass protest mobilization came to naught and left the society in discontent and depression. It is unlikely that protests will resume again in the near future. Though the protest organizers kept the movement within moderate frameworks, made compromises and held negotiations with the authorities and complied with the "rules of the game", they failed to achieve the goals, so, it is highly likely that at the next stage of social activities new protest leaders may emerge and they will be more radical and less bound by conventionalities of the traditional society. If it happens, protests may embark on another, more devastating, trajectory. In any case, such risks will remain in the midterm prospect. However, if the authorities try to intensify pressure, resort to repressions and crack down on organization centers of the current protests, the abovementioned risks may materialize in the short-term prospect.
