Faculty of law blogs / UNIVERSITY OF OXFORD

Corporate Governance In Russian State-Owned Enterprises: Real Or Surreal?


Roza Nurgozhayeva
Assistant professor of law at Nazarbayev University


Time to read

3 Minutes

The narrative that defines privatisation, corporatisation, and the separation of ownership and regulatory functions as the key prerequisites for a successful state-owned enterprises governance structure represents the literature’s leading approach. However, some legal scholars have scrutinised and questioned this single-minded view emphasising the impact of existing institutional conditions and calling for an alternative understanding of corporate governance dynamics in different state-owned enterprises (SOEs). Notwithstanding a vigorous debate on SOEs, it almost exclusively focuses on China (with very few exceptions), while Russia, being another large state-driven economy, has been ignored by the academic literature. My article fills the gap and offers a comparative and critical perspective on the state ownership system in Russia. This analysis is especially relevant since it sheds light on how Russia’s state ownership operates and helps us understand why international sanctions against Russia may fail to reach their target.

Since the late 1990s to early 2000s, when Bernard Black and Reinier Kraakman studied Russian institutional reforms, there had been no comprehensive analysis of the dynamics of corporate law and corporate governance in Russian companies and specifically SOEs. Most international experts and academics who examined Russia at the dawn of its institutional reforms previously assumed that the presence of the state in Russia’s economy had a temporary effect that would decrease or even disappear as soon as the market opened up and the formal institutional environment improved.

Today, Russia has been demonstrating the opposite tendency of the ‘reverse’ transition, establishing formal institutions that reinforce the state’s growing influence. From the early 2000s, the state has been consolidating strategic assets into state holding groups managed by newly established state corporations. Simultaneously, the Federal Government defined a few ‘trusted’ private group companies to maintain control over specific industries. Although there is no reliable data source on the exact number of SOEs in Russia and the official numbers vary, the state’s dominance in Russia’s economy is evident and profound. The Federal Antimonopoly Service of the Russian Federation revealed that the combined contribution of SOEs to Russia’s GDP in 2018 reached 60 per cent. Since 2017, the 20 largest SOEs have contributed 97 per cent of the total dividends received by the federal budget.

The analysis of Russia’s SOEs reveals a distinctive and sometimes controversial legal regime. In contrast to many other state-driven economies, including China, Russia’s policymakers seem to pay less attention to corporatisation, centralisation, and the separation of ownership and regulatory functions. The new forms of SOEs are non-commercial and non-corporate entities that are subjected to many statutory restrictions and close oversight from the state. Their governance structure includes supervisory boards, but they are not equivalent to corporate boards since their directors have no real fiduciary duties to the SOE. Directors and top managers are state appointees whose role is to fulfil the goals and targets established by state strategic policies. The state and the Federal Government acting on its behalf are positioned as the ultimate owner, not a shareholder. Growing economic pressure from the West has expedited the state sector’s expansion putting Russian SOEs in the spotlight. Therefore, it becomes critical to understand several inherent features of Russia’s state ownership system discussed in the article.

First, SOEs in Russia are decentralised and heterogeneous. The key federal property owners are state corporations. They control a broad portfolio of companies resembling a classic holding company structure that governs subsidiaries and affiliated organisations based on direct, indirect, or cross-shareholding. Their portfolio companies have a commercial focus and are very diverse in terms of industries, supply chains, markets, and organisational forms. Despite the term ‘corporation’ in their title, state corporations are unincorporated non-profit entities that have a clear non-financial focus—the interests of the Russian state. This means that: (1) state corporations’ incentives are not driven by financial results, and (2) they are not the main sources of revenues, but their portfolio companies are. In other words, the sanctions focused on state corporations might miss the real target—portfolio companies that fall outside the category of SOEs and, as a result, are hardly spotted by the sanctions.

Second, the state is a minority shareholder in half of incorporated SOEs in Russia. Notwithstanding a minority share, the state still utilises several governance tools to pursue its interests, including board and audit commission nominations, cumulative and qualified majority voting, access to financial and other corporate documents, ‘golden shares,’ and legislative provisions that protect the state’s share from any dilution. Minority shareholding allows the state to exercise actual control over a much larger number of profitable companies operating in the market.

Third, Russia’s state assets management lacks a correlation between management remuneration and the companies’ financial performance. There is no solid link between profit and management incentives in many SOEs, including the largest exporters Gazprom and Rosneft. Even the most profitable SOEs take advantage of soft budget constraints and existing federal programs to compensate for their costs. Therefore, financial losses would not substantially affect the incentive structures of management existing in these SOEs.

To conclude, Russia’s SOEs add another perspective to the understanding of state ownership systems and corporate governance narratives. In this context, international standards offered to SOEs may provide narrow insight into Russia’s state ownership system. While Russian markets continue to be affected by sanctions and countersanctions, the Russian economy continues relying on the state sector, which will be driven by the state strategies and Russia’s national interests. These strategies bring about legislative changes and state ownership policies that push the system even further away from contemporary governance standards. Without acknowledging this context and the actual dynamics of Russia’s state ownership system, the mainstream view on SOE governance sheds little light on SOEs in Russia. Unless this context is understood, attempting to draw a simple analogy between corporate governance theories and Russian SOEs will most likely obscure rather than illuminate the nature and impact of Russia’s SOEs.

Roza Nurgozhayeva is an assistant professor of law at Nazarbayev University.


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