The Last Convergence Attempt State Firms Must Focus on Profit and Dividends

Ovanes Oganisian
Analyst
Renaissance Capital

Russia was on a straight course to liberalization of its property, when in the middle of the road it realized that property liberalization should be delayed and for a while Russia should stick to state-owned corporations. Whether the current state of corporate ownership is a transition state from the Soviet style, where all propertyin the economy was state-controlled,to a fully liberalized economy is unclear. On onehand, there are many voices inthe government and in the presidential administration loudly supporting further privatization. On the other hand, thestate-owned companies exist, theyare very powerful, and theblock that supervises and advocates for thepresence of the state in the economy is very strong, drawing its strength fromsupporters at the very top of the food chain, which suggests that Russian state companies are here for a long time.

While the goals of the publicly traded corporations are quite simple — to increase capitalization — the goals of the Russian state companies are quite vague. Sometimes they aim at plans for very large capital expenditure and renovations such as in the utilities sectors, sometimes they want to lay so many pipelines that they could connect the Earth to the moon. Some state companies dream of everybody owning a piece of metal they can call a car, other state companies want you to drive a truck whenever you are traveling. Sometimes they try to heat you up (even if by hugging you to death) or they are not afraid to give dance lessons to elephants. As a side effect, these state companies are often plagued by corruption, bureaucracy and complex asset holdings.

While state companies have access to the cheapest funding sources, the prevalence of state companies in the economy creates imbalances that put private companies at a disadvantage and eventually drive them out of business.

Increasing capitalization is probably not a very intuitive goal for a state company. But making more money and paying larger dividends to its shareholders could become a very intuitive goal for Russian state companies. State companies must gradually concentrate on earning more profits and paying more dividends.

State companies first set their focus on functioning in the market-like environment back in 1963-68, when Soviet economist Yevsei Liberman offered to reform the economy by introducing the concept of price and net income into a centrally planned economy. The economy grew 7 percent to 8 percent a year in the next several years.

Now that the stock market has replaced the social competition of Soviet times, the government could demand two things from companies that it owns: It could ask state companies to pay a large portion of their net income as dividends and that dividends should grow each year.

Larger dividends imply higher market capitalization. Higher dividends implymore efficiently run enterprises, aswell as a better balance between capex and debt repayments. Also, higherdividends imply easier stock placements.

A dividend is an easy and quantifiable tool to demand a more efficient operation of an enterprise by the management. The government could further incentivize management to pay larger dividends if board members’ compensation is linked to dividends. The larger the dividends are, the larger the management’s compensation could be.

If the dividends are calculated on the basis on international accounting standards, this would allow companies to correctly account for revenue and profit, make necessary provisions and spend the rest of the money on debt payout and capex. Conditions like those would push most companies to report and operate to international standards in order to account properly for profit and expense. This will lead to a much better corporate governance environment.

Currently, Russian state companies are paying at most 8 percent to 10 percent of net income in dividends. Which is reminiscent of Italian and German National Socialism experiments in the 1930s that pushed companies to invest more, demanding that not less than 92 percent of profit is invested into capex and only 8 percent of profit to be distributed in dividends.

However, a more Soviet-type socialistic approach of “dividing the profit among all” as dividends is more applicable here.