## 4.1    The Size of the Russian State:  A Review of Available Estimates

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### Introduction and purpose
- Mainstream narrative: the Russian state is large and its size increased considerably in recent years, with claims the state doubled in size to reach 70 percent of GDP.
- Note on inconsistency: the 70 percent claim likely based on comparing EBRD (2007) estimate for Russia’s state size in 2005 (state’s share in value added) versus IMF (2014b) ratio of gross public sector revenues-to-GDP in 2012—two different concepts (value added share versus gross revenues/GDP).
- Objective:
  - estimate the size of the Russian state and discuss channels through which it leaves its footprint;
  - investigate whether the state’s size has significantly increased.
- Methodology overview:
  - propose a methodology to assess the state’s share in value added and use it to estimate the state’s size in Russia;
  - discuss relation between state’s share and economic concentration (competition policy and procurement rules);
  - assess SOEs’ relative efficiency vis-à-vis other firms.

### Channels through which the state leaves a footprint
- Two broad classifications of state activity:
  - (i) Activities addressing typical government responsibilities (law, order, security, education, health) that give rise to budget spending and taxes.
  - (ii) Activities as owner-manager of entities producing goods and services (SOEs).
- Additional channels and effects:
  - tax policy, budget spending composition, state’s share in investment and employment, SOEs with large balance sheets;
  - indirect public spending via regulations and mandates on private individuals and businesses (Friedman (1997) terminology);
  - procurement rules “can impact the structure and functioning of competition in the economy” (OECD (2011)); failures (collusion, governance problems, restrictive rules) can harm competition, SME development, innovation.

### Literature on state size, ownership, and efficiency (preserved references and findings)
- Inverted U-shaped association between state size and growth:
  - Barro (1991): finds inverted U-shape; peak when marginal product of government spending equals one; assumes balanced budget and proportional income tax.
  - Armey (1995) / Vedder and Gallaway (1998): “Armey Curve” linking government size and growth via provision of public goods then disincentives from excess size.
  - Facchini and Melki (2011): decompose benefits from correcting market failure and costs of state failure; review of 67 empirical studies finds non-linear long-period studies suggest an “optimal” government size in a range of 20 – 40 percent of GDP.
  - Friedman (1997): marginal contribution of government can turn negative in large increases (postulates marginal contribution negative “in going from 15 percent of national income to 50 percent”).
- Ownership and SOE efficiency:
  - Shleifer (1998); Shleifer and Vishny (1994): private ownership preferred when incentives to innovate and contain costs are strong.
  - Soft Budget Constraint (SBC) literature (Kornai (1979); Kornai et al. (2003); Guriev (2017)): SBCs via subsidies, soft credit, directed credit reduce incentives and distort capital allocation.
  - Boycko et al. (1993): stress importance of domestic competition and opening to international trade.

### Preferred metric and measurement methodology
- Preferred metric: the state’s share in value added (θ_G_t), defined as:
  - θ_G_t = (Σ_{i=1}^N VA_t(i) θ_t(i)_G) / Y_t
  - Notation preserved: θ_G_t is the state’s share in GDP in t; Y_t = Σ_{i=1}^N VA_t(i); N is the number of sectors; VA_t(i) is value added in sector i in t; θ_t(i)_G is the state’s share in sector i’s value added in t.
- Ownership perimeter options (exact formulations preserved):
  - Restrictive approach: include only SOEs that are 100 percent state-owned.
  - Less restrictive approach: include firms in which the state retains control (more than 50 percent ownership) as 100 percent of value added.
  - Looser approach: include 100 percent of value added of all firms in which the state has some ownership, even if below 50 percent.
  - Stricter approach: include a portion of value added equivalent to the exact stake the state has in the capital of a legal entity.
- Practical implementation:
  - because official θ_t(i)_G estimates per economic sector are generally unavailable, approximate implementation uses θ_G_t ≈ (Σ_{i=1}^N VA_t(i) θ_t(i)_G) / Y_t where θ_t(i)_G are estimates constructed from available official data;
  - proxies chosen sector-by-sector (sales or employment) depending on sector coverage and characteristics; for banks the ratio of state-owned banks’ assets-to-total assets used as proxy.

### Historical estimates and robustness caveats
- Longest time series: EBRD estimates covering 1991-2010.
  - EBRD: private sector’s share in GDP (θPrt) in Russia passed from 95 percent in 1991 to 30 percent in 1997.
  - After privatizations, state’s share remained stable through 2005, then increased by 5 percentage points to reach 35 percent of GDP in 2005, and stayed at 35 percent through 2010 (EBRD).
- Other studies and figures:
  - Krivoshapko and Westman (2017): state’s share in GDP about 33 percent in 2003, 31 percent in 2007 and 34 percent in 2016.
  - CSR (2018): state’s share in GDP expanding from about 40 percent in 2006 to 46 percent in 2016 (methodology: consolidated sales of largest 106 companies with state participation ≥ 10 percent; sales used as proxy for value added and not weighted by sector value added).
- Methodological caveats in available estimates:
  - use of revenues as proxy for value added without sectoral weighting;
  - failure to account for formal vs. informal sector value added (state operates only in formal sector);
  - inconsistent proxies across sectors (revenue vs. employment);
  - inadequate discussion of state perimeter.

### Russia-specific perimeter and classification choices
- Main ownership categories in official data (preserved examples):
  - State and Municipal: 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 (examples: Deposit Insurance Agency (DIA), National Development Bank (VEB), Rostech, Roskosmos, Rosatom).
  - Mixed Russian: firms jointly established by state and non-state entities; firms established by state and foreign entities with foreign stake ≤ 10 percent (examples: Gazprom, Rosneft, United Aircraft Corporation).
  - Private Russian; and Foreign and Foreign/Russian: entities in which the state is not a shareholder.
- Perimeter decision used in estimations:
  - include state, municipal, mixed Russian entities and government corporations in the state perimeter;
  - include 100 percent of value added of entities in which the state may have less than 100 percent ownership, justified by continued state influence and access to resources at partial ownership;
  - explicitly include subsidiaries of the largest 20 non-financial state conglomerates whose parents are classified as Mixed Russian (list includes Gazprom, Rosneft, Transneft, Inter RAO, Rushydro, Rosseti, Rostelekom, Aeroflot, Tatneft, Alrosa, United Aircraft Corporation, Helicopters of Russia, United Engines, United Shipbuilding Corporation).

### Results: size and sectoral composition (exact figures preserved)
- Aggregate estimates (2012 → 2016):
  - state’s share in output increased marginally from 32 percent in 2012 to 33 percent in 2016.
- 2016 breakdown:
  - General government represented 13.5 percent of GDP in 2016 (up from 13.1 percent of GDP in 2012).
  - SOEs accounted for 19.3 percent of GDP in 2016 (up from 18.8 percent in 2012).
- Employment and formal-sector adjustments:
  - Unadjusted state share in employment was 28 percent in 2016; after adjusting for state ownership and data coverage it climbs to 31 percent in 2016.
  - 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 climbs to about 40 percent when considering only value added originated in formal sector activities.
- Sectoral distribution and recent changes:
  - state’s share is large in extraction, natural monopolies, the financial sector, and public services; present in most economic sectors.
  - largely private sectors: agriculture and food processing; most manufacturing (excluding defense and oil and gas processing); trade.
  - recent increases concentrated in oil and gas extraction and processing and in the financial sector: state’s share in value added of oil and gas extraction and refining increased from about 35 percent in 2012 to close to 45 percent in 2016.
  - state’s share in total value added excluding oil and gas extraction and refining remained about constant at around 31 percent.

### State’s size, concentration, procurement, and competition (section highlights)
- Institutional framework:
  - Federal Anti-Monopoly Service (FAS) administers anti-monopoly legislation, regulates prices of natural monopolies, controls procurement of government and SOEs, and controls compliance with law on foreign investment in strategic industries.
  - A market share below 35 percent usually not considered dominant, while a share above 50 percent is.
- Banking sector:
  - over two-thirds of Russia’s banking system is dominated by state-owned banks.
  - largest three state-owned commercial bank groups (50 percent of the system’s assets) operate with no policy mandate.
  - state’s share in the banking sector increased in 2017 after the Central Bank rescued some large private banks.
- Procurement scale and methods:
  - total state procurement in Russia (excluding procurement of military equipment) represented 28.5 percent of GDP (on average) in 2015-18.
  - SOEs procurement (2017 data): only 4 percent of SOEs’ procurement was made via competitive methods (tenders and auctions); 31 percent via single-supplier methods; about 65 percent via other non-competitive methods; resulting in more than 95 percent of non-competitive procurement contracts.
  - in volume terms, single-supplier procurement accounted for more than 50 percent of total procurement; over 50 percent of SOEs’ purchases were made by the top 5 largest SOEs.
  - government procurement: electronic auctions used for 55 percent of tender notices (CSR (2017)); single-supplier procurement around 25 percent at pre-announcement stage increased to 60 percent of implemented procurement.
  - supplier concentration: 4 percent of suppliers accounting for 80 percent of government purchases.
- Procurement preferences for domestic suppliers:
  - “third is a crowd” rule: a foreign bid is ruled out if there are bids by two Russian suppliers or the Eurasian Economic Union (EAEU);
  - Russian suppliers enjoy a 15 percent price preference.
  - SME quotas: SMEs enjoy a 15 percent quota in government procurement; SOEs set SME quotas at 18 percent of total purchases.

### SOE performance and efficiency (empirical findings)
- Data and period:
  - analysis uses balance sheet data for a large cross section of Russian legal entities for the period 2012–16.
  - SOE performance comparisons reported at the 2-digit level for 2016.
- Empirical patterns:
  - privately-owned firms generally outperform SOEs across most market sectors and across activities with both low and high value added.
  - in some sectors (crude oil and gas extraction; oil and coke refining) SOE performance is similar to private firms.
  - in most sectors, ROA of private sector firms is higher than that of SOEs (examples: agriculture; production of electrical equipment; machinery and equipment; electricity, gas, steam, sewage).
  - cumulative distribution of ROAs for SOEs typically to the left of that for private firms.
- Legal and organizational issues:
  - large number of SOEs are "unitary enterprises" (commercial non-corporate legal entities assigned property owned by the state); unitary enterprises generally less transparent than JSCs, often create conflicts of interest, lack efficient corporate governance, and have limited bankruptcy risk.
  - in 2014 the Federal Government adopted a roadmap to liquidate all federal unitary enterprises in a period of 5 years; FAS proposed liquidation or conversion into JSCs (corporatization), including partial privatization.
- Consolidation potential:
  - out of about 28,500 SOEs operating in market sectors, around 500 represent more than 85 percent of revenues, suggesting scope for consolidation and efficiency gains.

### Key conclusions and analytical implications
- Quantitative conclusions:
  - The share of the Russian state in GDP is much smaller than the 70 percent asserted in the mainstream narrative; estimates point to a range of 30–35 percent.
  - The Russian state’s share in output has remained broadly unchanged in the last decade, though the state’s weight increased in banking and oil and gas extraction and refining and decreased in other sectors.
  - Accounting for the informal sector raises the state’s share substantially: nearly 40 percent of formal sector activity and just under 50 percent of formal sector employment.
  - Russia’s General Government size (supply-side value added share) is relatively small compared with OECD countries, yet the state’s share in total employment is relatively large—similar to Scandinavian countries.
  - State control in strategic natural resource industries increases the state’s share in output, consistent with patterns in other resource-rich transition economies.
- Analytical implication:
  - the footprint of the Russian state in the economy did not increase primarily because of an expanded size; policy analysis should focus on how the current state size and structure affect economic functioning (positively or negatively) rather than on large changes in state size alone.

### Policy recommendations and sequencing (preserved guidance)
- Overarching guidance:
  - develop a clear exit strategy for SOEs operating in sectors where there is no economic rationale for state ownership (including the banking sector); the strategy should be competition-enhancing given existing economic concentration.
  - carefully weigh advantages and disadvantages of further privatization; outright privatization unsequenced may increase economic concentration.
- Priority actions before privatization:
  - promote market entry and increase competition;
  - level the playing field in public procurement by reducing supplier concentration and facilitating SME development;
  - improve governance and management of state property (including corporatization of unitary enterprises into JSCs);
  - enforce competition policies, strengthen corporate governance, eliminate state control of capital allocation, and implement hard budget constraints alongside prudent macroeconomic policies.
- Procurement and competition-specific recommendations:
  - strengthen procurement rules, procedures, and controls to promote competition and efficiency given the large state demand for goods and services;
  - reduce non-competitive procurement by SOEs through tighter application of procurement law and narrowing permitted non-competitive methods;
  - improve the SME definition and qualification rules to prevent subsidiaries of large holdings from capturing SME quotas;
  - ensure domestic content rules and price preferences are calibrated to preserve market access, efficiency, and value chain development;
  - enhance transparency and enforcement by FAS, the Ministry of Finance, and the Accounting Chamber to reduce supplier concentration, bid rigging, conflicts of interest, and corruption.
- Literature-informed caution:
  - privatization alone is insufficient; the form and context of privatization matter (Acemoglu and Robinson (2013)); market liberalization, hard budget constraints, and prudent macroeconomic policies are essential (Brada (1996); Boycko et al. (1993)).

### Key statistics and facts (verbatim)
- Analysis period: 2012–16.
- Aggregate state’s share in output: 32 percent in 2012 → 33 percent in 2016.
- General government: 13.1 percent of GDP in 2012 → 13.5 percent of GDP in 2016.
- SOEs: 18.8 percent of GDP in 2012 → 19.3 percent of GDP in 2016.
- Unadjusted state share in employment: 28 percent in 2016; adjusted: 31 percent in 2016.
- Informal employment: about 38 percent of total employment in 2016.
- State’s share in formal sector value added: close to 40 percent.
- State’s share in formal sector employment: 50 percent.
- State procurement: about 28.5 percent of GDP (on average) in 2015-18.
- SOE procurement composition (2017): 4 percent competitive methods; 31 percent single-supplier; about 65 percent other non-competitive methods; more than 95 percent of non-competitive procurement contracts.
- Supplier concentration in government procurement: 4 percent of suppliers = 80 percent of purchases.
- Number of SOEs operating in market sectors: about 28,500; around 500 represent more than 85 percent of revenues.
- Total entities in Table 7 totals (verbatim): Market Activities 28,125; StateSubsidiaries 445; State + Subsidiaries 28,570; Non‐Market Activities 4,012; Total 32,137; StateSubsidiaries 449; State + Subsidiaries 32,586.

*Source: wpiea2019053 - 4.1    The Size of the Russian State:  A Review of Available Estimates*

### 4.1    The Size of the Russian State:  A Review of Available Estimates    .  .  .  .  .  .  .  .  .  .  .9

### 4.1    The Size of the Russian State:  A Review of Available Estimates

### Introduction
- Mainstream narrative: the Russian state is large and its size increased considerably in recent years, with claims the state doubled in size to reach 70 percent of GDP.
- The claim was likely based on an inconsistent comparison:
  - EBRD (2007) estimate for Russia’s state size in 2005 (state’s share in value added) versus
  - IMF (2014b) ratio of gross public sector revenues-to-GDP in 2012.
- These two figures measure different concepts (value added share versus gross revenues/GDP) but were widely reported, shaping perceptions of the Russian state’s growth.

### Channels through which the state leaves a footprint
- The state’s footprint can be assessed by its size, but size alone does not capture efficiency or allocation effects.
- Two broad classifications of state activity:
  - Activities addressing typical government responsibilities.
  - Activities as owner-manager of entities producing goods and services (SOEs).
- Literature references and conceptual points preserved exactly as presented:
  - Barro (1991), Armey (1995), and Friedman (1997): an inverted U-shaped association between the state’s size and economic growth.
  - Facchini and Melki (2011): empirical analyses generally support the inverted U-shape; optimal state size is country-specific.
  - Shleifer (1998): private ownership preferred when incentives to innovate and contain costs are strong.
  - Guriev (2017): soft budget constraints in SOEs and the national budget reduce efficiency in resource use (Kornai (1979) definition).
  - Boycko et al. (1993): soft credit to firms pursuing state objectives may allocate savings suboptimally.
  - Shleifer and Treisman (2005): note of perception vs. facts in transition economies.

### Market concentration, competition, and procurement
- A large state can increase market concentration and limit competition, affecting:
  - Market access,
  - Development of SMEs,
  - Innovation.
- Procurement rules matter: given the magnitude of public purchases, procurement can impact competition structure and functioning (OECD (2011)).
- Russia-specific institutional notes:
  - ”National Plan for the Development of Competition” argues a large state can negatively affect competition because private companies lack the same state support as SOEs.
  - State procurement legislation (for government and SOEs) recognizes the state’s large demand and potential significant impact on the economy.
  - The procurement system aims to support competition by:
    - Ensuring participation of the largest number of potential suppliers,
    - Developing new suppliers by setting mandatory SME quotas, among other objectives.

### Objective, methodology, and organization of the paper
- Objective: estimate the size of the Russian state and discuss channels through which it leaves its footprint; investigate whether the state’s size has significantly increased.
- Methodological approach:
  - Propose a methodology to assess the state’s share in value added and use it to estimate the state’s size in Russia.
- Coverage beyond size:
  - Discuss relation between state’s share and economic concentration (competition policy and procurement rules).
  - Assess SOEs’ relative efficiency vis-à-vis other firms in the economy.
- Organization:
  - Section 2: channels through which the state can leave its footprint.
  - Section 3: methodology to assess the state’s size.
  - Section 4: estimates for the size of the state in Russia and discussion of channels affecting economic performance.

*Source: wpiea2019053 - 4.1    The Size of the Russian State:  A Review of Available Estimates*

### Section 5 summarizes and concludes.

### Section 5 summarizes and concludes.

### State’s Size and its Footprint
- The channels through which a state leaves its footprint in the economy are numerous (tax policy, budget spending composition, state’s share in investment and employment, SOEs with large balance sheets).
- A usual metric to measure the state’s size is the ratio of government spending-to-GDP; it is popular because it is easy to compute and readily available, but can be misleading.
- More encompassing metrics include:
  - The state’s share in total employment.
  - The value added created by the state (state’s value added), which includes general government plus state-owned firms in the non-financial and financial sectors.
- The state’s activities can be classified broadly into:
  - (i) Activities addressing typical government responsibilities (law, order, security, education, health) that give rise to budget spending and taxes.
  - (ii) Activities as owner-manager of entities producing goods and services (SOEs), which may substitute for private provision and create direct state spending.
- There is also “indirect” public spending via regulations and mandates on private individuals and businesses (Friedman (1997) terminology).
- Procurement matters: given the magnitude of public purchases, procurement rules “can impact the structure and functioning of competition in the economy” (OECD (2011)); failures in procurement design (collusion, governance problems, restrictive rules) can negatively affect competition, SME development, innovation, and the range and depth of services and infrastructure a state can provide.

### Literature on State Size, Efficiency, and Growth
- Barro (1991):
  - Builds an endogenous growth model (drawing on Romer (1989), Lucas (1988), Rebelo (1990)).
  - Assumes constant returns to scale in private capital and public services; public services (infrastructure, law enforcement, national defense) raise the marginal product of private capital.
  - Finds an inverted U-shaped association between government spending and growth: per capita income growth initially rises with taxes because of positive effects of public services, then peaks and declines as higher taxes reduce private incentives.
  - Assumes government runs a balanced budget, public services are free of charge, financed with a proportional income tax rate.
  - Interpretation: the peak occurs when the marginal product of government spending equals one.
- Friedman (1997):
  - Argues government’s average contribution to growth may be positive but its marginal contribution can turn negative if government grows too large; postulates marginal contribution negative “in going from 15 percent of national income to 50 percent”.
- Vedder and Gallaway (1998) / Armey Curve (Armey (1995)):
  - Describe an inverted U-shaped “Armey Curve” linking government size and economic growth; rationale: early government growth establishes rule of law and property rights improving investment, but excessive government share creates disincentives and reduces growth.
- Facchini and Melki (2011):
  - Decompose the inverted U-shape into two curves: benefits from correcting market failure and costs of state failure.
  - Positive effects of public spending diminish as intervention increases; negative effects of state failure increase with size (crowding-out, incentive effects of taxation, rent-seeking, political/bureaucratic transaction costs).
  - Argue costs and benefits are country-specific (bureaucratic inefficiency, willingness to pay taxes, how well price system works).
  - Review of 67 empirical studies: studies on advanced economies using linear models and recent short time series often find negative association; non-linear long-period studies find a range of 20 – 40 percent of GDP for the “optimal” government size.

### State Ownership, SOEs, and Market Effects
- Barro’s model abstracts from state ownership of firms under specific conditions (identical technology, capital mobility). Empirical assessment often needs to incorporate SOEs’ activity.
- State’s value added is a more encompassing concept than government spending-to-GDP as it captures both government and SOEs’ activities; in transition contexts the state’s share in value added was used as an operational concept of the state’s footprint.
- Shleifer (1998) and Shleifer and Vishny (1994):
  - Argue private ownership preferred when incentives to innovate and contain costs are strong; corporatization and privatization increase firm efficiency when governance problems impose costs.
  - SOEs often pursue multiple objectives, leading to high operating costs and lower-quality output; may charge prices below marginal cost to win popular support.
  - Macroeconomic stability (harder budget constraints) can promote firm efficiency.
- Soft Budget Constraint (SBC) literature (Kornai (1979); Kornai et al. (2003); Guriev (2017)):
  - Firms face technology, demand, and budget constraints. A budget constraint is “soft” when losses are almost automatically compensated by the state.
  - SBCs arise via budgetary subsidies, soft bank credits, directed credit, and contribute to bad bank loans, demand inflation, bubbles.
  - In market economies an SBC can appear because creditors have incentives to refinance failing borrowers (zombie lending).
  - SBCs reduce incentives for better performance and distort allocation of capital.
- Market concentration and competition:
  - Large state presence can increase concentration and limit competition, especially in public services and natural monopolies.
  - Boycko et al. (1993) emphasize creating competitive marketplaces (domestic competition and opening to international trade) to increase firm efficiency.
  - In financial markets, subsidized or directed capital, or soft credit for firms pursuing state objectives, can result in non-commercial allocation of savings and hurt efficiency and growth.
- Efficiency improvements often require access to capital for new technologies and expansion; if capital is not allocated on commercial terms, dynamic efficiency is impaired.

### Measuring the Size of the State (Preferred Metric and Implementation)
- Preferred metric: the state’s share in value added (θ_G_t), defined as the ratio between the sum of value added created by the state across all economic sectors and GDP:
  - θ_G_t = (Σ_{i=1}^N VA_t(i) θ_t(i)_G) / Y_t
  - Notation: θ_G_t is the state’s share in GDP in t; Y_t = Σ_{i=1}^N VA_t(i); N is the number of sectors; VA_t(i) is value added in sector i in t; θ_t(i)_G is the state’s share in sector i’s value added in t.
- The estimate θ_G_t depends on how the state’s perimeter is defined (which determines θ_t(i)_G).
- Possible perimeters/ownership criteria (exact formulations preserved):
  - Restrictive approach: consider as part of the state the value added created by SOEs that are only 100 percent state-owned.
  - Less restrictive approach: calculate θ_t(i)_G considering 100 percent of the value added of firms in which the state retains control (namely more than 50 percent ownership).
  - Looser approach: extend the state’s perimeter to 100 percent of the value added of all firms in which the state has some ownership, even if it is below 50 percent.
  - Stricter approach: consider as part of the state a portion of the value added equivalent to the exact stake the state has in the capital of a given legal entity, no matter whether that stake is above or below 50 percent.
- Because official θ_t(i)_G estimates per economic sector are generally unavailable, approximate implementation uses:
  - θ_G_t ≈ (Σ_{i=1}^N VA_t(i) θ_t(i)_G) / Y_t  (expression 2), where θ_t(i)_G are estimates constructed from available official data.
- The country’s National Statistical Institute is best positioned to calculate the exact expression 1, but in practice a “second best” approximation is required using available data and clear perimeter definitions.
- The chosen perimeter and sectoral allocation rules will materially affect the magnitude of θ_G_t and the interpretation of the state’s footprint.

*Source: wpiea2019053 - Section 5 summarizes and concludes.*

### 4.1    The Size of the Russian State:  A Review of Available Estimates

### 4.1    The Size of the Russian State:  A Review of Available Estimates

### Historical estimates and context
- The longest time series for breakdown of value added between private and public sectors in Russia corresponds to EBRD estimates covering 1991-2010.  
- EBRD estimated the private sector’s share in GDP (θPrt) for all transition economies in Eastern Europe (EE) and the Former Soviet Union (FSU).  
- Using EBRD’s estimates, the Russian state’s share in value added passed from 95 percent in 1991 to 30 percent in 1997.  
- After two waves of privatization in the 1990s (mass privatization and the 1995-97 loans-for-shares), the state’s share in GDP remained stable through 2005, then increased by 5 percentage points to reach 35 percent of GDP in 2005, and stayed at 35 percent through 2010 (EBRD).  
- Krivoshapko and Westman (2017) report state’s share in GDP of about 33 percent in 2003, 31 percent in 2007 and 34 percent in 2016.  
- CSR (2018) reports a state’s share in GDP expanding from about 40 percent in 2006 to 46 percent in 2016 (methodology: consolidated sales of largest 106 companies with state participation ≥ 10 percent; sales used as proxy for value added and not weighted by sector value added).  
- Cross-country and regional context:  
  - EBRD (2010) shows Russia’s state share in GDP was similar to the transition-economies average in 2010.  
  - At the start of transition, Russia’s state share was among the largest in EE and FSU but privatized faster in the early 1990s; after 1997 other transition economies caught up.  
  - OECD (2015) employment data suggest Russia’s state employment share is relatively large—smaller than Denmark’s and Norway’s, but larger than Sweden’s—and has decreased since the early 2000s.  
  - General Government expenditure in Russia represents about 35 percent of GDP (up from 30 percent in the early 2000s).

### Methodological caveats in available estimates
- Common methodological issues identified in existing estimates:  
  - Use of revenues as an approximation for value added without sectoral weighting.  
  - Failure to account for formal vs. informal sector value added (state only operates in formal sector).  
  - Inconsistent proxies across sectors (revenue vs. employment).  
  - Inadequate discussion of state perimeter (which entities count as state).  
- The note’s chosen approach: approximate the state’s share in value added per sector using official revenue from sales or employment per economic sector, selecting the proxy (sales or employment) depending on sector coverage and sector characteristics.  
  - For banks, where sales data are not available, the ratio of state-owned banks’ assets-to-total assets of the banking sector is used as a proxy.

### State perimeter and ownership classification
- Main ownership categories in official data:  
  - State and Municipal: 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 jointly established by state and non-state entities; firms established by state and foreign entities with foreign stake ≤ 10 percent (examples: Gazprom, Rosneft, United Aircraft Corporation).  
  - Private Russian; and Foreign and Foreign/Russian: entities in which the state is not a shareholder (including fully privatized firms) and subsidiaries where the state’s stake is below 100 percent.  
- Perimeter decision: include state, municipal, mixed Russian entities and government corporations in the state perimeter.  
  - This approach includes 100 percent of value added of entities in which the state may have less than 100 percent ownership, justified by continued state influence and access to resources even at partial ownership.  
  - To correct for subsidiaries of partially state-owned firms being classified as non-state, the calculation explicitly includes subsidiaries of the largest 20 non-financial state conglomerates whose parents are classified as Mixed Russian (list includes Gazprom, Rosneft, Transneft, Inter RAO, Rushydro, Rosseti, Rostelekom, Aeroflot, Tatneft, Alrosa, United Aircraft Corporation, Helicopters of Russia, United Engines, United Shipbuilding Corporation).

### Approximation formula (conceptual)
- The approximated state’s share in value added per sector is constructed by applying the state’s share in the chosen proxy (sales or employment) to sector value added (formal sector), recognizing limitations in cross-firm capital/labor and revenue/value added ratios and coverage of formal sector only.

### Results: current size and sectoral composition
- Aggregate estimates (2012 → 2016): state’s share in output increased marginally from 32 percent in 2012 to 33 percent in 2016.  
- Breakdown in 2016:  
  - General government represented 13.5 percent of GDP in 2016 (up from 13.1 percent of GDP in 2012).  
  - SOEs accounted for 19.3 percent of GDP in 2016 (up from 18.8 percent in 2012).  
- Employment and formal-sector adjustments:  
  - Unadjusted state share in employment was 28 percent in 2016; after adjusting for state ownership and data coverage it climbs to 31 percent in 2016.  
  - Informal employment was about 38 percent of total employment in 2016—this limits the upward adjustment from employment shares.  
  - The share of state employment in formal employment is close to 50 percent.  
  - The state’s share climbs to about 40 percent when considering only value added originated in formal sector activities.  
- Sectoral distribution and recent changes:  
  - The state’s share is large in extraction, natural monopolies, the financial sector, and public services; present in most economic sectors.  
  - Largely private sectors: agriculture and food processing; most manufacturing (excluding defense and oil and gas processing); trade.  
  - Recent increases in state share concentrated in oil and gas extraction and processing and in the financial sector: the state’s share in value added of oil and gas extraction and refining increased from about 35 percent in 2012 to close to 45 percent in 2016.  
  - State’s share in total value added excluding oil and gas extraction and refining remained about constant at around 31 percent.

### Key conclusions and implications
- Quantitative conclusions:  
  - The share of the Russian state in GDP is much smaller than the 70 percent asserted in mainstream narrative; estimates (this note and others) point to a range of 30–35 percent.  
  - The Russian state’s share in output has remained broadly unchanged in the last decade, though the state’s weight increased in banking and oil and gas extraction and refining and decreased in other sectors.  
  - Accounting for the informal sector raises the state’s share substantially: nearly 40 percent of formal sector activity and just under 50 percent of formal sector employment.  
  - Russia’s General Government size (supply-side value added share) is relatively small compared with OECD countries, yet the state’s share in total employment is relatively large—similar to Scandinavian countries.  
  - State control in strategic natural resource industries increases the state’s share in output, consistent with patterns in other resource-rich transition economies.  
- Analytical implication:  
  - The footprint of the Russian state in the economy did not increase primarily because of an expanded size; policy analysis should focus on how the current state size and structure affect economic functioning (positively or negatively) rather than on large changes in state size alone.

*Source: 4.1 The Size of the Russian State: A Review of Available Estimates (content unit wpiea2019053).*

### 4.5    State’s Size, Concentration and Competition

### 4.5    State’s Size, Concentration and Competition

### Regulatory framework and institutional responsibilities
- Russian legislation aims to prevent and suppress monopolistic activities and unfair competition, and to limit the state’s role in restraining competition.
- 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;
  - controls compliance with the law on foreign investment in strategic industries.
- FAS assesses competition by defining market perimeter; calculating concentration levels (using concentration ratios or the Herfindahl index); and diagnosing dominant positions on a case-by-case basis.
  - A market share below 35 percent is usually not considered dominant, while a share above 50 percent is.
- FAS initiates investigations of anti-monopoly violations; approves mergers and acquisitions that may violate economic concentration benchmarks; and can decide on partition of firms.
- FAS and the Central Bank of Russia (CBR) jointly:
  - are responsible for ensuring competition in the financial sector;
  - developed a road map and jointly establish criteria to detect dominant market positions and to approve mergers and acquisitions.
- Competition-restricting agreements (cartels) can be punished by criminal penalties, including prison terms.
- The Ministry of Finance controls contract execution and bidding prices for government procurement; the Accounting Chamber controls procurement contracts ex-post.

### State presence and sectoral concentration
- The state’s share is large in:
  - sectors deemed strategic: oil and gas extraction and processing, defense;
  - natural monopolies and public services: electricity, water and sanitation, heating, pipeline and railway transportation;
  - the financial sector: banking and other financial services;
  - public administration, security, health and education.
- Many of these sectors are subject to large economies of scale and decreasing marginal costs, are usually concentrated, and often have some state presence.
- Including entities with foreign and state participation in the state’s perimeter would increase the state’s size by about 1 percentage point (preliminary calculation).
- Available data suggests that the state’s share in employment has decreased since the early 2000s.
- Economic concentration is high even in sectors where the state’s presence is relatively low; Gini coefficients are above 0.80 in most economic sectors (Table 5 reference in source).

### Banking sector specifics
- Over two-thirds of Russia’s banking system is dominated by state-owned banks (divided into development institutions, commercial banks, and hybrid banks).
- The largest three state-owned commercial banks groups (50 percent of the system’s assets) operate with no policy mandate and in similar market segments with private banks.
- A hybrid state-owned agricultural bank with a policy mandate to focus on agribusiness also engages in broader commercial activities.
- The state development institution does not compete with commercial credit institutions and does not collect retail deposits; it has a broad policy mandate.
- The state’s share in the banking sector increased in 2017 after the Central Bank rescued some large private banks.
- Most state-owned banks (except the largest) have lower profitability than private banks despite advantages such as implicit and explicit state guarantees and access to relatively cheap government deposits.

### State procurement: scale, methods, and effects on competition
- Total state procurement in Russia (excluding procurement of military equipment) represented 28.5 percent of GDP (on average) in 2015-18.
- Government procurement system objectives: accountability, efficiency, fairness, transparency, and effectiveness; procurement is also used for SME development.
- SMEs enjoy a 15 percent quota in government procurement.
- Procurement reform elements:
  - system designed to support competition by ensuring the largest number of potential suppliers;
  - implementation of anonymous electronic auctions (to become mandatory in 2019);
  - rules to ensure transparency and free access for state procurement (special regulations apply for defense purchases).
- Measures that favor domestic suppliers:
  - “third is a crowd” rule: a foreign bid is ruled out if there are bids by two Russian suppliers or the Eurasian Economic Union (EAEU);
  - Russian suppliers enjoy a 15 percent price preference.
  - When preferences are used, procurement aims at Russian producers competitive in external markets.
- SOEs procurement law:
  - regulates procurement by SOEs, state-regulated entities (including utility companies, monopolies), and entities receiving state support;
  - SOEs include parent companies and subsidiaries with a state’s share higher than 50 percent;
  - FAS decides on application of the law;
  - sets SME quotas at 18 percent of total purchases for SOEs;
  - mandates publication of procurement plans for five years ahead, information disclosure requirements, and internal procurement regulations.
- SOE procurement methods and concentration (2017 data):
  - only 4 percent of SOEs’ procurement was made via competitive methods (i.e., 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 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).
- Government procurement competitiveness and supplier concentration:
  - share of single-supplier procurement around 25 percent at the stage of pre-announcement increased to 60 percent of implemented procurement due to rules allowing purchases if the auction fails but one appropriate bid was submitted (or remained after removing bids that did not fit formal requirements);
  - a new auction is required when no bids were submitted, or no bids satisfied requested requirements;
  - electronic auctions were used for 55 percent of tender notices (CSR (2017));
  - supplier concentration is strong: 4 percent of suppliers accounting for 80 percent of government purchases.
- Competition in state procurement is impaired by a partial definition of SMEs: a subsidiary of a large holding that fits the legal SME definition qualifies to fill SME quotas.
- Amendments to SOE procurement law aimed to increase transparency and prevent collusion by streamlining and itemizing competitive and non-competitive procurement methods.

### Key findings and policy implications
- Findings:
  - The Russian state’s size contributes to concentration in sectors with high Gini coefficients, particularly strategic sectors, natural monopolies, public services, and finance.
  - High concentration is also present in sectors with low state presence, consistent with past analyses emphasizing large horizontally and vertically integrated groups.
  - The relatively large volume of state procurement (28.5 percent of GDP on average in 2015-18) makes procurement rules and their enforcement central to competition policy.
  - SOE procurement is predominantly non-competitive (over 95 percent non-competitive contracts), with high supplier concentration and a small number of SOEs accounting for a large share of purchases.
  - Government procurement is more competitive than SOE procurement but still shows high single-supplier use and supplier concentration (4 percent of suppliers = 80 percent of purchases).
  - SME quotas and domestic preferences (15 percent price preference, “third is a crowd”) are used to support domestic producers but can limit market access and efficiency when applied without constraints.
- Policy implications and recommendations (implicit from text):
  - Strengthen procurement rules, procedures, and controls to promote competition and efficiency given the large state demand for goods and services.
  - Reduce non-competitive procurement by SOEs through tighter application of procurement law and narrowing permitted non-competitive methods.
  - Improve the SME definition and qualification rules to prevent subsidiaries of large holdings from capturing SME quotas.
  - Ensure that domestic content rules and price preferences are calibrated to preserve market access, efficiency, and value chain development.
  - Enhance transparency and enforcement by FAS, the Ministry of Finance, and the Accounting Chamber to reduce supplier concentration, bid rigging, conflicts of interest, and corruption.

*Source: IMF staff analysis in “4.5    State’s Size, Concentration and Competition” (source content provided).*

### 4.6    State’s Size and Efficiency

### 4.6    State’s Size and Efficiency

### Overview
- The section focuses on the state as owner-manager of SOEs and its implications for overall economic performance.
- Analysis uses basic performance indicators (Return-on-Assets, ROA; Return-on-Equity, ROE) computed from balance sheet data for a large cross section of Russian legal entities for the period 2012–16.
- Comparison indicates privately-owned firms generally outperform SOEs across most market sectors and across activities with both low and high value added.

### SOE Performance
- Empirical patterns:
  - In some sectors (e.g., crude oil and gas extraction; oil and coke refining) SOE performance is similar to private firms.
  - In most sectors, ROA of private sector firms is higher than that of SOEs (examples: agriculture; production of electrical equipment; machinery and equipment; electricity, gas, steam, sewage).
  - The cumulative distribution of ROAs for SOEs is typically to the left of that for private firms, indicating lower returns for SOEs in many activities.
- Related evidence and literature:
  - Guriev and Rachinsky (2005) (early 2000s data) find federal- and regional-government-controlled firms lag large private Russian conglomerates and foreign-owned firms.
  - Soft budget constraints, limited corporate governance, and absence of bankruptcy risk are cited as factors weakening SOE performance.

### Market Structure, Concentration, and Procurement
- State presence and market concentration:
  - The state contributes to concentration in several sectors; concentration is high even in sectors with low state presence.
  - SOEs have large presence in strategic sectors (energy, defense), natural monopolies (electricity, gas, water, railway transportation), and the financial sector.
- Procurement and market access:
  - State procurement represented about 28.5 percent of GDP in 2015-18.
  - Most SOE procurement occurs through non-competitive methods and supplier concentration is high.
  - Law allows SME quotas to be used by subsidiaries of larger firms and permits unconstrained use of price advantages for domestic suppliers; both features limit market access, efficiency, and value chain development.
- Legal and organizational issues:
  - A large number of SOEs are "unitary enterprises" (commercial non-corporate legal entities that are assigned property owned by the state or a municipal government).
  - Unitary enterprises are generally less transparent than JSCs, often create conflicts of interest (state as property owner, consumer, and market regulator), lack efficient corporate governance (e.g., a Board of Directors), and have limited bankruptcy risk.
  - Federal unitary enterprises declined since the 1990s, while regional unitary enterprises increased; lack of a unified regional/municipal policy remains problematic.
  - In 2014 the Federal Government adopted a roadmap to liquidate all federal unitary enterprises in a period of 5 years; FAS proposed liquidation or conversion into JSCs (corporatization), including partial privatization.

### Size of the State and Distributional Footprint
- Measured shares:
  - The state represented about one third of Russia’s GDP in 2016.
  - The Russian state represents close to 40 percent of formal sector value added and 50 percent of formal sector employment.
  - The state’s share in value added increased significantly in energy and banking in the last 5 years, but only slightly overall (from 32 to 33 percent of GDP).
- Coverage and methodology:
  - Estimates approximate the state’s share in value added by its share in sales for market activities and by employment for non-market activities.
  - The state’s perimeter includes resident subsidiaries of the 20 largest state-controlled non-financial companies (entities generally classified as private in official data).

### Implications for Resource Allocation and Competition
- Channels of adverse impact:
  - Lower competition and lower efficiency from state presence.
  - Large state presence in the financial sector may bias allocation of savings toward large players (state and non-state), reinforcing concentration.
  - State ownership can create conflicts of interest (owner and regulator), undermining competition.
- Consolidation and efficiency potential:
  - Out of about 28,500 SOEs operating in market sectors, around 500 represent more than 85 percent of revenues, suggesting scope for consolidation and efficiency gains.
  - Conversion of numerous regional unitary enterprises into JSCs is proposed to increase transparency, efficiency, and competition.

### Policy Recommendations and Sequencing
- Overarching guidance:
  - Develop a clear exit strategy for SOEs operating in sectors where there is no economic rationale for state ownership (including the banking sector); the strategy should be competition-enhancing given existing economic concentration.
  - Carefully weigh advantages and disadvantages of further privatization; outright privatization unsequenced may increase economic concentration.
- Priority actions before privatization:
  - Promote market entry and increase competition.
  - Level the playing field in public procurement by reducing supplier concentration and facilitating SME development.
  - Improve governance and management of state property (including corporatization of unitary enterprises into JSCs).
  - Enforce competition policies, strengthen corporate governance, eliminate state control of capital allocation, and implement hard budget constraints alongside prudent macroeconomic policies.
- Literature-informed caution:
  - Privatization alone is insufficient; the form and context of privatization matter (Acemoglu and Robinson (2013)); market liberalization, hard budget constraints, and prudent macroeconomic policies are essential (Brada (1996); Boycko et al. (1993)).

### Key Statistics and Facts (preserved verbatim)
- Analysis period: 2012–16.
- SOE performance comparisons: reported at the 2-digit level for 2016.
- Number of SOEs operating in market sectors: about 28,500.
- Concentration among SOEs: around 500 represent more than 85 percent of revenues.
- State share of GDP in 2016: about one third.
- Formal sector value added: close to 40 percent.
- Formal sector employment: 50 percent.
- Change in state’s share overall: from 32 to 33 percent of GDP (last 5 years).
- State procurement: about 28.5 percent of GDP in 2015-18.
- Total entities in Table 7 totals: Market Activities 28,125; StateSubsidiaries 445; State + Subsidiaries 28,570; Non‐Market Activities 4,012; Total 32,137; StateSubsidiaries 449; State + Subsidiaries 32,586.

*Source: 4.6    State’s Size and Efficiency, wpiea2019053.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019053.pdf_