## The state's share in output has increased marginally in the last few years, from 32 percent

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### The State’s Footprint in the Economy — Key findings
- The Russian state's share in GDP was around 33 percent in 2016.
- The state's share in the formal sector is close to 40 percent.
- Available cross-country employment data suggests the Russian state's employment share is about 31 percent.
- General Government expenditure in Russia represents about 35 percent of GDP and increased from about 30 percent of GDP in the early 2000s.
- EBRD: private sector 65 percent in 2010 (implying state share ≈ 35 percent); EBRD series discontinued after 2010.
- Krivoshapko (2017): assesses the state's share in supply at about 34 percent.
- CSR (2018): estimates the state’s share in GDP expanded from about 40 percent in 2006 to 46 percent in 2016; CSR (2018) also reports a SOEs share in sales of 40 percent under an alternative definition and sample.
- The state's weight increased in certain sectors, notably banking and oil extraction and processing.
- Sectors with high state share (e.g., oil and gas extraction, natural monopolies) are more concentrated, but concentration is large even in sectors where the state's share is low.
- Existing policies to protect and promote competition, including state procurement rules, need to be strengthened; current policies are described as “geared more at form than at substance.”

### Measurement approach and perimeter choices
- Ideal metric: ratio between sum of value added created by the state across all economic sectors and GDP (expression (1) conceptualized).
- Approximations used:
  - Expression (2): sectoral estimates and available proxies.
  - Expression (3): proxies 푋푡(푖)퐺,푗 with j={푆, 퐿} where 푆 = sales, 퐿 = employment; for financial services asset shares used.
- Proxy selection depends on sector: use sales for market sectors; use employment for non-market sectors (Public Administration and Defense, Compulsory Social Security, Education, Healthcare, Other Communal and Personal Services).
- State’s perimeter definitions considered:
  - Restrictive: firms 100 percent state-owned.
  - Less restrictive: firms with >50 percent state ownership counted at 100 percent.
  - Loose: include 100 percent of value added of all SOEs with any state ownership.
  - Strict proportional: account exactly for state ownership share in each SOE.
- Chosen perimeter for main results: include state, municipal, mixed Russian entities, government corporations, and subsidiaries of the largest 20 non-financial state conglomerates (loose definition).
- Adjustment: include subsidiaries of the largest 20 non-financial state conglomerates to correct classification where subsidiaries of partially state-owned parents are recorded as non-state.
- Preliminary calculation: including Foreign-state entities in the state's perimeter would increase the state's size by about 1 percentage point.

### Aggregate and sectoral results
- Aggregate state's share in value added:
  - Gross Value Added (2016): 33 percent.
  - Gross Value Added (2012): 32 percent.
  - The state's share in value added rose from 32 percent in 2012 to 33 percent in 2016.
- Formal sector and employment:
  - Adjusted employment shares: state's share in employment climbs to 31 percent in 2016 (from an official figure of 28 percent).
  - Informal employment was about 38 percent of total employment in 2016.
  - The share of state employment in formal employment is close to 50 percent.
  - The state’s share in value added created by the formal sector climbs to about 40 percent.
- Key sectoral shares (selected, as reported):
  - Mining and Extraction: Raw Sales Shares 4 (2016) / 8 (2012); Adjusted Sales Share 44 (2016) / 34 (2012).
  - Electricity, gas, steam and hot water: Raw Sales Shares 36 (2016) / 37 (2012); Adjusted Sales Share 52 (2016) / 57 (2012).
  - Transport and Communications: Raw Sales Shares 34 (2016) / 38 (2012); Adjusted Sales Share 48 (2016) / 52 (2012).
  - Finances: Assets Share 59 (2016) / 50 (2012).
  - Non-market sectors: Public Administration, Defense, Social Security — Labor Share 99 (2016) / 100 (2012); Education — Labor Share 92 (2016) / 93 (2012); Health and Social Work — Labor Share 87 (2016) / 90 (2012).

### Market concentration, competition, and procurement
- Concentration metrics:
  - 15 Most Concentrated: Median Gini 0.94; Median State's Share 46.5.
  - 15 Least Concentrated: Median Gini 0.82; Median State's Share 3.2.
  - Examples: Crude Oil and Gas Extraction — Gini 0.93; State's Share 67. Electricity, Gas, Steam — Gini 0.94; State's Share 57. Telecommunications — Gini 0.95; State's Share 22. Waste Disposal — Gini 0.70; State's Share 26.
  - Gini coefficients are above 0.80 in most sectors, indicating high concentration even where state presence is low.
- Competition framework:
  - The Federal Anti-Monopoly Service (FAS) administers anti-monopoly legislation, regulates prices for natural monopolies, controls procurement of government and SOEs (including defense), and enforces law on foreign investment in strategic industries.
  - Market share thresholds: below 35 percent usually not considered dominant; above 50 percent considered dominant.
  - Competition-restricting agreements may carry criminal penalties.
- Government procurement:
  - SMEs enjoy a 15 percent quota in government procurement.
  - Electronic auctions used for 55 percent of tender notices (CSR, 2017); anonymous electronic auctions to become mandatory in 2019.
  - Share of single-supplier procurement around 25 percent at pre-announcement, rising to 60 percent of implemented procurement due to auction-fail rules.
  - Supplier concentration: 4 percent of suppliers account for 80 percent of government purchases.
  - Domestic content and price preferences: “third is a crowd” rule and 15 percent price preference for Russian suppliers.
- SOE procurement specifics:
  - SOE SME quota: 18 percent of total purchases.
  - In 2017: only 4 percent of SOEs' procurement was via competitive methods; 31 percent single-supplier; about 65 percent via other non-competitive methods; resulting in more than 95 percent of non-competitive procurement contracts by type.
  - In volume terms, single-supplier procurement accounted for more than 50 percent of total procurement.
  - Over 50 percent of SOEs purchases were by the top 5 largest SOEs (including Rosneft and three subsidiaries, and Russian Railways).
  - Amendments to law regulating SOE procurement were to become effective by mid-2018 to clarify competitive vs non-competitive methods.
- Procurement limitations undermining SME support:
  - Partial SME definition allows subsidiaries of large holdings that fit legal SME definition to fill SME quotas.

### Banking sector: ownership, performance, efficiency, and competition
- System structure and concentration:
  - Financial system dominated by banks with assets amounting to about 93 percent of GDP as of end-2017.
  - Total number of credit institutions was 561 as of end-2017, down from 923 at end-2013.
  - By end-November 2017, three large state-owned groups (Sberbank, Total VTB group, Gazprombank) had over 50 percent of system assets.
- Top banking groups (assets, shares in system) — selected figures (as reported):
  - Sberbank of Russia — State — 388 — 29.4 — 32.9 — 34.4
  - Total VTB group — State — 231 — 17.5 — 17.9 — 17.4
  - Gazprombank — State — 92 — 7.0 — 7.8 — 7.7
  - Russian Agricultural Bank — State — 51 — 3.9 — 4.4 — 4.1
- Ownership shares (by end-November 2017, percent of system total assets):
  - State-owned banks — 59% (Assets) / 65% (Loans)
  - Banks under CBR rehabilitation — 7% / 5%
  - Top 10 Private banks — 12% / 12%
  - Foreign-owned banks — 6% / 5%
  - Specialised retail banks — 1% / 2%
  - Other banks — 15% / 11%
- Capitalization and profitability:
  - Regional T1 Ratio Weighted by Assets, percent, average 2008-2017:
    - State (Russia) — 11.1
    - Private (Russia) — 10.4
    - System (Russia) — 11.0
    - Average (excluding Russia) — 11.4 (state), 12.4 (private), 12.0 (system)
  - Profitability (2008-2017) — selected:
    - Sberbank of Russia: ROA 2.1; ROE 18.8; NIM 3.3; Operating Expense / Operating Income 63.7
    - State (excl. Sberbank) ROA 0.1; ROE (0.8); NIM 1.9; Operating Expense / Operating Income 94.0
    - Private banks (Russia) ROA 1.2; ROE 19.6; NIM 2.5; Operating Expense / Operating Income 77.3
    - System (Russia) ROA 1.0; ROE 13.8; NIM 2.4; Operating Expense / Operating Income 74.2
  - Net interest margins of POBs are higher than SOBs; default rate of SOBs is around 1 percent higher than POBs (inclusion of development banks drives much of this difference); excluding development banks SOBs default rate has historically been only slightly higher than POBs.
- Efficiency analysis (DEA):
  - DEA under intermediation approach, six model specifications, sample around 600 banks, period 2002–2016.
  - Technical efficiency scores: 1 = on frontier.
  - Key findings:
    - Russia’s large banks are lagging peers and the gap has not shrunk over time.
    - Russian banks were never close to the efficiency frontier; during 2014–16 they fell further behind.
    - SOBs’ efficiency has declined relative to POBs; Sberbank is an outlier among SOBs with consistently high efficiency scores.
    - Cross-country analysis shows Russian banks are less efficient than peers, with no indication of convergence.
- Competition analysis (Panzar-Rosse H-stat):
  - Aggregate H-stat = 0.45 — consistent with monopolistic competition.
  - H-statistics by ownership (annual bank-level Bankscope sample 2001–13 and Fitch-based sample):
    - All banks in sample: H-stat 0.447; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
    - Private domestic: H-stat 0.432; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
    - State-owned banks: H-stat 0.383; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
    - Foreign-owned: H-stat 0.564; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - H-stat by asset size (domestic private and SOBs):
    - Domestic private H-stat increases with size: >80th percentile 0.445***; >90th percentile 0.482***; >95th percentile 0.521***; >99th percentile 0.670***.
    - State-owned banks: >80th percentile 0.297***; >90th percentile 0.198*.
  - Cross-country comparison:
    - H-stat for SOBs in Brazil and India is statistically larger than that for SOBs in Russia, implying Russian SOBs are less competitive.
  - Interpretation: foreign-owned banks appear most competitive; degree of competition of POBs larger than SOBs, but not always statistically significant.

### Efficiency, consolidation potential, and firm-level ownership facts
- Out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues — indicating scope for consolidation and efficiency gains.
- Comparative ROA evidence (2012–16): privately-owned firms broadly outperform SOEs in most market sectors; in 2016 SOE ROAs similar to private in some sectors (crude oil and gas extraction, oil and coke refining) but lower in many others.
- Cumulative ROA distributions show state entities often have lower returns than private entities.

### Summary findings
- Staff estimates suggest the state represented about one third of Russia’s value added (VA) in 2016.
- The Russian state represents close to 40 percent of formal sector activity and 50 percent of formal sector employment.
- SOEs are present in most sectors. In the last 5 years (to 2016), the state’s share in VA increased significantly in energy and banking, but only slightly overall (from 32 to 33 percent of GDP).
- The large state contributes to lower efficiency in resource use and reduced market competition.
- The state's presence contributes to concentration in several sectors; concentration is high even in sectors with low state presence.

### Policy implications and recommendations
- Strengthen policies to protect and promote competition, including in state procurement.
- Ensure state procurement system objectives (maximize participation, develop new suppliers, enforce SME quotas) are effectively implemented to support competition and SME development.
- Reduce supplier concentration and facilitate SME development by tightening SME definitions and limiting use of domestic price advantages that constrain market access and value chain development.
- Increase the effective use of competitive procurement methods for SOEs; law amendment clarifying competitive versus non-competitive procurement types should improve monitoring.
- Promote market entry and level the playing field in public procurement before major privatization to avoid further concentration.
- Consolidate many of the smaller SOEs and improve governance and management of state property to capture efficiency gains: out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues.
- Develop a clear, competition-enhancing exit strategy for sectors with no economic rationale for state ownership (including the banking sector) once markets are more competitive and state management becomes more efficient.
- Address the large state presence in the financial sector to prevent biased allocation of savings that may favor large players and further support economic concentration.
- Sequence reforms: strengthen institutional architecture (transparency, accountability, governance standards) before privatization to avoid concentration and support competitive outcomes.

*Prepared by Gabriel Di Bella, Oksana Dynnikova, and Slavi Slavov (EUR). Source: IMF staff on the basis of official data, excerpt from the chapter "The state's share in output has increased marginally..." (cr18276).*

### 1. The Russian State Size: Cross Country Comparison _______________________________ 14

### 1. The Russian State Size: Cross Country Comparison

### The State’s Footprint in the Economy — Key Findings
- The Russian state's share in GDP was around 33 percent in 2016.
- The state's share in the formal sector is close to 40 percent.
- Available cross-country employment data suggests the Russian state's employment share is about 31 percent, similar to that of Scandinavian countries (lower than Denmark’s and Norway’s, but higher than Sweden’s).
- General Government expenditure in Russia represents about 35 percent of GDP and increased from about 30 percent of GDP in the early 2000s.
- Several estimates and studies:
  - EBRD: private sector 65 percent in 2010 (implying state share ≈ 35 percent); EBRD series discontinued after 2010.
  - Krivoshapko (2017): assesses the state's share in supply at about 34 percent.
  - CSR (2018): estimates the state’s share in GDP expanded from about 40 percent in 2006 to 46 percent in 2016; CSR (2018) also reports a SOEs share in sales of 40 percent under an alternative definition and sample.
- The state's weight increased in certain sectors, notably banking and oil extraction and processing.
- Sectors where the state's share is high (e.g., oil and gas extraction, natural monopolies) are more concentrated, but concentration is large even in sectors where the state's share is low.
- Existing policies to protect and promote competition, including state procurement rules, need to be strengthened; current policies are described as “geared more at form than at substance.”

### Introduction — Context and Channels of Influence
- Mainstream narrative: Russian state perceived as large and having increased considerably in recent years; some claims suggested the state doubled to reach 70 percent of GDP, but those claims relied on inconsistent measures (EBRD private-sector implicit estimate vs. public sector revenues).
- Channels through which a larger state can leave a footprint:
  - Dominant SOEs or state conglomerates can increase market concentration and limit competition.
  - State procurement rules can either promote or limit competition, affecting market access for SMEs and innovation.
  - The larger the state's share, the more it matters for overall efficiency in resource allocation, especially in financial markets.
- National Plan for the Development of Competition notes that a large state can negatively affect competition because private companies do not enjoy the same state support as SOEs.
- State procurement system objectives: ensure participation of the largest number of potential suppliers and develop new suppliers by setting mandatory SME quotas.

### Review of Available Data — Consistent Messages and Limitations
- Consistent messages from available estimates:
  - The size of the Russian state is much smaller than 70 percent of GDP; most measures point to a range of 30–35 percent.
  - No clear upward trend for the size of the Russian state in the past few years overall, though the state's weight increased in sectors such as banking and oil extraction.
  - The Russian state is relatively large by international standards.
- Limitations and issues with existing estimates:
  - Many estimates use revenues as approximation of value added without weighting by sectoral value added per sector.
  - Estimates often do not consider that value added is created by both formal and informal sectors while the state operates in the formal sector only.
  - Different sectors require different best-approximation variables (e.g., revenue or employment).
  - The definition of the state's perimeter (which entities are counted as state) varies and affects results.
- Regional variation: regions with lower per capita income (which receive relatively larger federal transfers) generally have a larger state size.

### Measuring the Size of the Russian State — Methodology and Approximations
- Ideal measure: ratio between sum of value added created by the state across all economic sectors and GDP (expression (1) notation and structure described).
- Key formulae and proxies:
  - Exact expression (1) for state's share in GDP described conceptually.
  - Approximated state's share (expression (2)) uses sectoral estimates and available proxies.
  - Approximated sectoral state's share using observable proxies (expression (3)):
    - 푋푡(푖)퐺,푗 denotes the variable j={푆, 퐿} used as a proxy for value added in sector i (푆 = sales, 퐿 = employment).
    - Choice between sales or employment as proxy depends on sector coverage and how value added is manifested (e.g., education/health have low sales but high employment).
  - For financial services, asset shares will be used as no sales data are available.
- State’s perimeter matters substantially; distinct approaches:
  - Restrictive: include only firms 100 percent state-owned.
  - Less restrictive: include SOEs in which the state retains control (more than 50 percent ownership) at 100 percent of value added.
  - Looser: include 100 percent of value added of all SOEs in which the state has some ownership (even below 50 percent).
  - Strict proportional: consider the exact ownership state's share in value added of each SOE.
- Because official 휃푡(푖)퐺 per sector estimates are unavailable, the paper approximates 휃̅푡(푖)퐺 using available official data on sales and employment by ownership and applies expression (2) together with actual value added.

### The State’s Perimeter — Ownership Categories and Implementation Choices
- Main ownership categories in official data:
  - State and Municipal: include state and municipal budgetary and extra-budgetary entities; unitary enterprises; subsidiaries of entities 100 percent state-owned (examples: Russian Road Company, Rosneftegaz, Russian Railways, United Shipbuilding Corporation).
  - Government corporations: non-profit state-owned organizations established by special laws to implement government policies (examples: Deposit Insurance Agency (DIA), National Development Bank (VEB), Rostech, Roskosmos, Rosatom).
  - Mixed Russian: firms established jointly by state and non-state entities; firms established by state and foreign entities in which the foreign stake does not exceed 10 percent (examples: Gazprom, Rosneft, United Aircraft Corporation).
  - Private Russian; and, Foreign and Foreign/Russian: private Russian entities include those in which the state is not a shareholder (including fully privatized firms); subsidiaries of such entities; subsidiaries of entities in which the state's stake is below 100 percent (implying many subsidiaries of mixed Russian parents are classified as private).
- Chosen perimeter for approximation:
  - Include state, municipal, mixed Russian entities, and government corporations in the state's perimeter — described as a “loose” definition because it includes 100 percent of value added of entities in which state ownership may be below 100 percent.
  - Rationale: even when state share is below 100 percent (or below 50 percent), the state often retains weight in decision making, influence, and access to resources.
- Adjustment for subsidiary classification:
  - To correct for many subsidiaries of partially state-owned firms being classified as non-state, the approximation includes within the state's perimeter the subsidiaries of the largest 20 non-financial state conglomerates (parent companies classified as 'Mixed Russian').
  - The list of these largest 20 non-financial state conglomerates includes: Gazprom, Rosneft, Transneft, Inter RAO, Rushydro, Rosseti, Rostelekom, Aeroflot, Tatneft, Alrosa, United Aircraft Corporation, Helicopters of Russia, United Engines, and United Shipbuilding Corporation.

### Results — Summary Observations and Policy Implications
- Aggregate and sectoral results (high-level):
  - Aggregate state's share: around 33 percent of GDP in 2016; close to 40 percent in the formal sector.
  - No strong recent upward trend in the overall state share, but sectoral increases (banking, oil and gas extraction and processing).
- Competition and concentration:
  - Sectors with high state share are more concentrated; however, market concentration is large even in sectors with low state share.
  - Existing competition policies and state procurement legislation appear insufficiently focused on strengthening competition and supporting SMEs; they are observed to be more oriented toward formal compliance than substantive competition outcomes.
- Policy implications highlighted:
  - Strengthen policies to protect and promote competition, including in state procurement.
  - Ensure state procurement system objectives (maximize participation, develop new suppliers, enforce SME quotas) are effectively implemented to support competition and SME development.
  - Recognize and address the state’s influence within partially state-owned firms and conglomerates when assessing competitive dynamics and policy design.

*Prepared by Gabriel Di Bella, Oksana Dynnikova, and Slavi Slavov (EUR).*

### 16.      The state's share in output has increased marginally in the last few years, from 32 percent

### 16.      The state's share in output has increased marginally in the last few years, from 32 percent

### State size and composition
- The state's share in value added (VA) rose from 32 percent in 2012 to 33 percent in 2016.
- The state's perimeter includes state, municipal, and mixed Russian entities and government corporations, as well as the subsidiaries of the largest 20 non-financial state-owned conglomerates whose parent companies are classified as 'Mixed-Russian'.
- For market sectors the state's share is approximated by its share in sales; for (mostly) non-market sectors ("Public Administration and Defense", "Compulsory Social Security", "Education", "Healthcare"; and, "Other Communal and Personal Services") it is approximated by the state's share in employment.
- For "Finances", the state's share is approximated by the share of state banks in banking sector assets as reported by the Central Bank.
- Preliminary calculations suggest that including Foreign-state entities in the state's perimeter would increase the state's size by about 1 percentage point.

Key sectoral shares (selected, as reported in Table 2)
- Gross Value Added (2016): 33 percent; Gross Value Added (2012): 32 percent.
- Mining and Extraction: Raw Sales Shares 4 (2016 table) / 8 (2012 table); Adjusted Sales Share 44 (2016) / 34 (2012).
- Electricity, gas, steam and hot water: Raw Sales Shares 36 (2016) / 37 (2012); Adjusted Sales Share 52 (2016) / 57 (2012).
- Transport and Communications: Raw Sales Shares 34 (2016) / 38 (2012); Adjusted Sales Share 48 (2016) / 52 (2012).
- Finances: Assets Share 59 (2016) / 50 (2012).
- Non-market sectors (examples): Public Administration, Defense, Social Security — Labor Share 99 (2016) / 100 (2012); Education — Labor Share 92 (2016) / 93 (2012); Health and Social Work — Labor Share 87 (2016) / 90 (2012).

Employment and formal sector
- Adjusted employment shares to correct for state ownership and data coverage: the state's share in employment climbs to 31 percent in 2016 (from an official figure of 28 percent).
- Informal employment was about 38 percent of total employment in 2016.
- The share of state employment in formal employment is close to 50 percent.
- The state’s share in value added created by the formal sector climbs to about 40 percent.
- Available data suggests that the state's share in employment has decreased since the early 2000s.

### State's footprint: market concentration, competition, and procurement
- The state's presence is large in extraction, natural monopolies, the financial sector and public services, but the state is present in most sectors of economic activity.
- The state's share is larger in sectors with higher concentration (as measured by the Gini Coefficient).
- Even in sectors with a relatively low state's presence, economic concentration is relatively high, with Gini coefficients above 0.80 in most sectors.

Market concentration (selected statistics from Table 3)
- 15 Most Concentrated: Median Gini 0.94; Median State's Share 46.5.
- 15 Least Concentrated: Median Gini 0.82; Median State's Share 3.2.
- Examples: Crude Oil and Gas Extraction — Gini 0.93; State's Share 67. Electricity, Gas, Steam — Gini 0.94; State's Share 57. Telecommunications — Gini 0.95; State's Share 22. Waste Disposal — Gini 0.70; State's Share 26.

Competition policy and institutions
- The Federal Anti-Monopoly Service (FAS) administers and enforces anti-monopoly legislation; regulates prices of natural monopolies; controls procurement of both the government and SOEs, including defense; and controls compliance with the law on foreign investment in strategic industries.
- The law prohibits the abuse of a dominant position, including by the state. FAS defines market perimeters, calculates concentration levels (using concentration ratios or the Herfindahl index), diagnoses dominant positions, initiates investigations, approves mergers and acquisitions, and can decide on partition of firms.
- A market share below 35 percent is usually not considered dominant, while a share above 50 percent is.
- Competition-restricting agreements (cartels) could be punished by criminal penalties, including prison terms.

Procurement: government and SOEs
- Government procurement aims to ensure accountability, efficiency, fairness, transparency, and effectiveness. SMEs enjoy a 15 percent quota in government procurement.
- Government procurement uses anonymous electronic auctions (to become mandatory in 2019). Electronic auctions were used for 55 percent of tender notices (CSR, 2017).
- Government procurement: share of single-supplier procurement around 25 percent at the stage of pre-announcement, increased to 60 percent of implemented procurement because law allows purchases if the auction fails but one appropriate bid was submitted (or remained after removing bids that did not fit formal requirements). Supplier concentration: 4 percent of suppliers account for 80 percent of government purchases.

SOE procurement specifics
- SOEs procurement rules are more flexible than those for the government. SOEs include parent companies and subsidiaries with a state's share higher than 50 percent.
- SOE procurement mandates SME quotas of 18 percent of total purchases.
- Most SOE procurement contracts are settled through non-competitive methods: in 2017, only 4 percent of SOEs' procurement was made via competitive methods (i.e., using tenders and auctions); 31 percent was concluded through single-supplier methods; about 65 percent was made via other non-competitive methods (numbering about 5000 various procurement types), resulting in more than 95 percent of non-competitive procurement contracts.
- In volume terms, single-supplier procurement accounted for more than 50 percent of the total procurement.
- Over 50 percent of SOEs purchases were made by the top 5 largest SOEs (including Rosneft and three of its subsidiaries, as well as Russian Railways).
- Amendments to the law regulating SOE procurement were to become effective by mid-2018 to streamline and itemize competitive and non-competitive procurement methods.

Procurement protections and limitations
- Procurement is used to support SME development but is partially undermined by a partial definition of SMEs: a subsidiary of a large holding fitting the legal SME definition qualifies to fill the SME quota.
- Government procurement also supports domestic industry through domestic content rules and price preferences: a “third is a crowd” rule excludes a foreign bid if there are bids by two Russian suppliers or the Eurasian Economic Union (EAEU); Russian suppliers enjoy a 15 percent price preference.

### State's size and efficiency
- Comparative performance: Return-on-Assets (ROA) for 2012–16 shows privately-owned firms broadly outperform SOEs in most market sectors.
- For 2016, SOE ROAs are similar to private firms in some sectors (e.g., crude oil and gas extraction, oil and coke refining) but private sector firms have higher ROA in many sectors including agriculture, manufacturing (e.g., production of electrical equipment, machinery and equipment), and public services (electricity, gas, steam, sewage).
- The cumulative distribution of ROAs for state entities is often to the left of that for private sector entities, indicating lower returns for SOEs.

Firm distribution and consolidation potential
- Out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues, suggesting many smaller firms operate in similar economic sectors and that consolidation could yield efficiency gains.
- Better governance and management of state property could increase efficiency.
- A clear exit strategy should be developed for sectors where there is no economic rationale for state ownership (including the banking sector), but sequencing matters because outright privatization could increase concentration.

### Summary and policy implications
Findings
- Staff estimates suggest the state represented about one third of Russia’s value added (VA) in 2016.
- The Russian state represents close to 40 percent of formal sector activity and 50 percent of formal sector employment.
- SOEs are present in most sectors of activity. In the last 5 years (to 2016), the state’s share in VA increased significantly in energy and banking, but only slightly overall (from 32 to 33 percent of GDP).
- The large state leaves its footprint in the form of lower efficiency in the use of resources, and in reduced market competition.
- The state's presence contributes to concentration in several sectors, and concentration is high even in sectors with low state presence.

Policy implications and recommendations
- Given the large state, procurement policies are essential to promote competition. Reduce supplier concentration and facilitate SME development by tightening SME definitions and limiting use of domestic price advantages that constrain market access and value chain development.
- Increase the effective use of competitive procurement methods for SOEs; the law amendment clarifying competitive versus non-competitive procurement types should improve monitoring.
- Promote market entry and level the playing field in public procurement before major privatization to avoid further concentration.
- Consolidate many of the smaller SOEs and improve governance and management of state property to capture efficiency gains: out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues, indicating scope for consolidation.
- Develop a clear, competition-enhancing exit strategy for sectors with no economic rationale for state ownership (including the banking sector) once markets are more competitive and state management becomes more efficient.
- Address the large state presence in the financial sector to prevent biased allocation of savings that may favor large players and further support economic concentration.

*Source: IMF staff on the basis of official data, excerpt from the chapter "The state's share in output has increased marginally..." (cr18276).*

### References

### References

### Cited sources
- Center for Strategic Research (CSR), 2017, “State Procurements. What Procurement System Do We Need?”.
- Center for Strategic Research (CSR), 2018, “Efficient State Property Management in 2018–24 and Through 2035”.
- Di Bella, G., O. Dynnikova, and F. Grigoli, 2018, “Russia: Fiscal Federalism and Regional Performance”, Russian Journal of Economics (forthcoming).
- European Bank for Reconstruction and Development (EBRD) 2005, “Transition Report 2005: Business in Transition”.
- Government of Russia (GOR), 1995, “On the Natural Monopolies” (Law 147–FZ of 1995).
- Government of Russia (GOR), 2006, “On the protection of competition” (Law 135–FZ of 2006).
- Government of Russia (GOR), 2010, “On Detecting a Dominant Position of a Firm” (FAS order 220 of 2010).
- Government of Russia (GOR), 2011, "On Procurement by State-owned Enterprises" On Purchases of Goods, Works and Services by Certain Types of Legal Entities (Law 223–FZ of 2011).
- Government of Russia (GOR), 2012, “On the State Defense order” (Law 275–FZ of 2012).
- Government of Russia (GOR), 2013, “On Government Procurement” On the Contract System in State and Municipal Procurement of Goods, Works and Services (Law 44–FZ of 2013).
- Government of Russia, GOR, 2017 The National Plan for the Development of Competition (Decree 618 of 2017).
- Government of Russia (GOR), 2018, Monitoring of the Enforcement of the Federal Law 223–FZ of July 18, 2011 “On Purchases of Goods, Works and Services by Certain Types of Legal Entities” in 2017, the Ministry of Finance.
- International Monetary Fund, 2014, “Russian Federation: Fiscal Transparency Evaluation”, May.
- Krivoshapko A. and M. Westman, 2017, “Myth and Reality; Share of the Government in the Russian Economy—with the numbers”, Prosperity Analysis, November 2017.
- Organization for Economic Cooperation and Development (OECD), 2015, “Government at a Glance”.

### Key empirical findings and diagnostics (chapter excerpt)
- SOBs represent over two-thirds of the banking system by assets.
- The financial system is dominated by banks with assets amounting to about 93 percent of GDP as of end-2017.
- As of end-2017 the total number of credit institutions was 561, down from 923 at end-2013.
- By end-November 2017, three large state-owned groups (Sberbank, Total VTB group, Gazprombank) had over 50 percent of system assets.
- Table of top banking groups (assets, shares in system):
  - Sberbank of Russia — State — 388 — 29.4 — 32.9 — 34.4
  - Total VTB group — State — 231 — 17.5 — 17.9 — 17.4
  - Gazprombank — State — 92 — 7.0 — 7.8 — 7.7
  - Total Moscow Exchange group — Private — 58 — 4.4 — 1.2 — 2.3
  - Russian Agricultural Bank — State — 51 — 3.9 — 4.4 — 4.1
  - Total Alfa group — Private — 44 — 3.3 — 3.7 — 3.5
  - Total Otkritie group — Private — 35 — 2.6 — 1.9 — 2.5
  - Total Credit Bank of Moscow group — Private — 32 — 2.4 — 2.0 — 3.3
  - Total B&N Bank group — Private — 28 — 2.1 — 1.2 — 0.8
  - Total Promsvyaz group — Private — 24 — 1.8 — 1.8 — 1.9
  - Total Soc. Gen. group — Foreign — 20 — 1.5 — 1.2 — 1.4
  - AO UniCredit Bank — Foreign — 19 — 1.4 — 1.4 — 1.5
  - Total Sovcombank group — Private — 15 — 1.1 — 0.8 — 0.5

### Stylized facts on ownership, capitalization, and profitability
- Ownership shares (by end-November 2017, percent of system total assets):
  - State-owned banks — 59% (Assets) / 65% (Loans)
  - Banks under CBR rehabilitation — 7% / 5%
  - Top 10 Private banks — 12% / 12%
  - Foreign-owned banks — 6% / 5%
  - Specialised retail banks — 1% / 2%
  - Other banks — 15% / 11%
- SOBs have higher Tier I capital ratio than the rest of the system (definition: ratio of Tier I capital of banks with specified ownership type over total system level Tier I capital, using Fitch Ratings, Russian Banks Datawatch 11M17).
- Capital ratios (Regional T1 Ratio Weighted by Assets, percent, average 2008-2017):
  - State (Russia) — 11.1
  - Private (Russia) — 10.4
  - System (Russia) — 11.0
  - Average (excluding Russia) — 11.4 (state), 12.4 (private), 12.0 (system)
- Loan book quality (by end of Nov. 2017, Percent):
  - Charted measures: Accumulated accrued interests; Loan impairment reserves to gross loan ratio (LIR); Overdue installment — with specialized retail banks and private banks showing higher overdue amounts; state and foreign-owned banks showing lower overdue amounts.
- Profitability averages (2008-2017) — selected metrics:
  - ROA (return on assets), ROE (return on equity), Net Interest Margin (NIM), Operating Expense / Operating Income — reported by ownership and by country in cross-country comparison; notable entries:
    - Sberbank of Russia: ROA 2.1; ROE 18.8; NIM 3.3; Operating Expense / Operating Income 63.7
    - State (excl. Sberbank) ROA 0.1; ROE (0.8); NIM 1.9; Operating Expense / Operating Income 94.0
    - Private banks (Russia) ROA 1.2; ROE 19.6; NIM 2.5; Operating Expense / Operating Income 77.3
    - System (Russia) ROA 1.0; ROE 13.8; NIM 2.4; Operating Expense / Operating Income 74.2
- Net interest margins of POBs are higher than SOBs; default rate of SOBs is around 1 percent higher than POBs (inclusion of development banks drives much of this difference); excluding development banks SOBs default rate has historically been only slightly higher than POBs.

### Efficiency analysis: Data Envelopment Analysis (DEA)
- Methodology:
  - DEA applied under the intermediation approach (Sealey and Lindley (1977)).
  - Inputs: deposits or interest expense, non-interest operating expenses (or personnel and other operating expenses), equity; employees and branches used in alternative specifications.
  - Outputs: earning assets, net loans, securities, operating profits, operating income.
  - Six model specifications considered; results reported as simple averages across models.
  - Technical efficiency scores computed under constant returns to scale: 1 = on frontier; values closer to zero = further from frontier.
- Sample and timing:
  - Around 600 banks, period 2002–2016, data averaged over three-year periods (five periods).
  - Cross-country sample of eight bank-dominated financial systems.
- Key DEA findings:
  - Russia’s large banks are lagging peers and the gap has not shrunk over time.
  - Russian banks were never close to the efficiency frontier; during 2014–16 they fell further behind.
  - SOBs’ efficiency has declined relative to POBs; Sberbank is an outlier among SOBs with consistently high efficiency scores.
  - Cross-country analysis shows Russian banks are less efficient than peers, with no indication of convergence.
  - Rankings are robust in pattern across models: private banks tend to occupy top spots; Sberbank is in the top quintile; other SOBs are more uniformly distributed across quintiles.

### Competition analysis: Non-structural approach (Panzar-Rosse H-stat)
- Approach:
  - Panzar and Rosse (1987) methodology used to estimate H-statistic: sum of elasticities of bank revenue with respect to input prices.
  - Revenue equation estimated with fixed effects: ln(Pit) = αi + β1*ln(W1it) + β2*ln(W2it) + β3*ln(W3it) + γ*ln(Zit) + δ*Dt + εit
    - Pit = ratio of gross revenues to total assets (proxy for banks’ output price)
    - W1 = ratio of interest expenses to total deposits and money market funding (input price of deposits)
    - W2 = ratio of personnel expenses to total assets (input price of labor)
    - W3 = ratio of other operating and administrative expense to total assets (input price of equipment/fixed capital)
    - Z includes equity/total assets, net loans/total assets, total assets; Dt = year dummies.
- Sample:
  - Bank-level data from Fitch Connect; coverage above 80 percent of system assets.
  - Sample excludes non-bank credit institutions, asset management companies, security firms, and development banks.
  - Number of banks included in regression analysis by year: (examples)
    - 2005: 679 (operating credit institutions in Russia 1235; Fitch Connect 704)
    - 2016: 511 (operating credit institutions in Russia 623; Fitch Connect 542)
  - Ownership classification: 74 banks identified as foreign-owned; 25 banks identified as SOBs (sample period).
- H-stat results and interpretation:
  - Aggregate H-stat = 0.45 — consistent with monopolistic competition.
  - Null hypotheses that H-stat equals zero and that H-stat equals 1 can be rejected.
  - By ownership:
    - Foreign-owned banks appear the most competitive; their H-stat is statistically larger than POBs and SOBs.
    - H-stat for POBs is larger than for SOBs but difference is not statistically significant.
  - Equilibrium condition accepted in all cases.

*Italic: IMF staff compilation from "THE ROLE OF THE STATE IN THE RUSSIAN BANKING SECTOR" (References and chapter excerpts).*

### 0.55 using annual bank-level data from Bankscope for the period 2001–13.

### cr18276 - 0.55 using annual bank-level data from Bankscope for the period 2001–13.

### H-Statistics by Type of Ownership
- Table 5: H-Statistics by Type of Ownership
  - All banks in the sample: H-stat 0.447; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Private domestic: H-stat 0.432; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - State-owned banks: H-stat 0.383; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Foreign-owned: H-stat 0.564; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
- Table 6: Hypothesis Testing for H-Statistics (pairwise)
  - Private domestic (i) vs SOBs (ii): Ho: H-stat (i) > H-stat (ii) = 0.705; Ho: H-stat (i) < H-stat (ii) = 0.295
  - Foreign-owned (i) vs Private domestic (ii): Ho: H-stat (i) > H-stat (ii) = 0.983; Ho: H-stat (i) < H-stat (ii) = 0.017
  - Foreign-owned (i) vs SOBs (ii): Ho: H-stat (i) > H-stat (ii) = 0.952; Ho: H-stat (i) < H-stat (ii) = 0.048

### H-Statistic by Asset Size (domestic private and SOBs)
- Method: Sample of domestic POB and SOBs divided by total assets distribution (above 80th, 90th, 95th, and 99th percentiles).
- Table 7: H-Statistic by Asset Size
  - Domestic private:
    - H-stat, total assets > 80th percentile: 0.445***
    - H-stat, total assets > 90th percentile: 0.482***
    - H-stat, total assets > 95th percentile: 0.521***
    - H-stat, total assets > 99th percentile: 0.670***
  - State-owned banks:
    - H-stat, total assets > 80th percentile: 0.297***
    - H-stat, total assets > 90th percentile: 0.198*
  - Note: ***, **, * denotes statistically different from zero at 1, 5, and 10 percent.
- Interpretation from text:
  - For domestic private banks, the H-stat would increase for larger banks.
  - H-stat for POBs with assets above the 99th percentile is statistically larger than for the whole group of domestic POBs, but results are inconclusive where the equilibrium condition was not accepted in all cases.
  - For SOBs, the H-statistic does not change for larger SOBs (the equilibrium condition was accepted).

### Cross-country comparison: Brazil and India
- Purpose: Estimate H-statistic by ownership for Brazil and India to observe SOB performance where SOBs have important participation.
- Table 8: H-Statistics for the Brazilian Banking Sector
  - Banking sector: H-stat 0.64; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Domestic private: H-stat 0.71; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - State-owned: H-stat 0.63; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
    - Federal: H-stat 0.58; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
    - State: H-stat 0.68; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Foreign-owned: H-stat 0.46; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Foreign-owned (assets above 75th percentile): H-stat 0.73; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
- Table 9: H-Statistics for the Indian Banking Sector
  - Domestic private and public banks: H-stat 0.65*; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Public banks: H-stat 0.55; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Private banks (group I): H-stat 0.71; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Private banks (group II): H-stat 0.59*; Ho: H-stat=0, P-value 0.000; Ho: H-stat=1, P-value 0.000
  - Note: 1/ Definition based on the Reserve Bank of India’s publication “A Profile of Banks 2012–2013”. *The equilibrium condition was not accepted.
- Comparative finding:
  - Table 10: Comparison of H-Statistics for SOBs in Russia, India, and Brazil
    - SOBs Brazil (i) vs SOBs Russia (ii): Ho: H-stat (i) > H-stat (ii) = 0.974; Ho: H-stat (i) < H-stat (ii) = 0.026
    - SOBs India (i) vs SOBs Russia (ii): Ho: H-stat (i) > H-stat (ii) = 0.950; Ho: H-stat (i) < H-stat (ii) = 0.050
  - Text interpretation: The degree of competition of SOBs in Brazil and India is statistically larger than that of SOBs in Russia, implying Russian SOBs are less competitive. Caution advised because financial ratios reflect macroeconomic performance, regulatory differences, institutional quality, judicial system, and bank-specific factors.

### Summary and Policy Implications
- Financial performance and efficiency
  - SOBs have healthy balance sheets compared to POBs, but profitability is lower, except for Sberbank which has high profitability both within Russia and compared to peer countries.
  - System-level profitability of the Russian banking system is better than the average of peer countries.
  - The Russian banking system is far from the efficiency frontier:
    - Data envelopment analysis (DEA) finds Russian POBs have been slipping relative to POBs.
    - Cross-country analysis shows Russian banks are less efficient than peers, with no indication of convergence.
- Competition and ownership structure
  - Results suggest the Russian banking sector operates under monopolistic competition.
  - Foreign-owned banks appear to be the most competitive.
  - Degree of competition of POBs is larger than for SOBs, but not statistically different.
  - Larger POBs indicate a higher degree of competition.
- Policy recommendations
  - Authorities are encouraged to increase private initiative, including via privatization and reduction of the footprint of the state.
  - Strengthen institutional architecture before privatization to avoid further concentration of economic power after privatization; this includes strengthening transparency, accountability, and governance standards in the corporate sector.
  - Sequencing is critical: first strengthen institutional frameworks to accompany increased private sector participation.

*International Monetary Fund staff summary from the provided chapter content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18276.pdf_