Vladimir Yakunin - The Treacherous Path - An Insider's Account of Modern Russia

It was a reminder, as if one were needed, that there is no such thing as pure, unadulterated free-market capitalism anywhere in the world. The state always plays a role. This might be a question of keeping a car plant or a steel works open that would otherwise be doomed if left to fend for itself. Someone in the government decides that the social or political cost of allowing it to close is too great.

The same is true in Russia. One could, for instance, make an argument to say that the coal industry in Russia has no real right to exist any more. It is a low-value commodity, which also happens to be extremely bulky, so if you were to apply the same tonnage pricing as you do to oil, but factored in the costs involved in mining it in Central Siberia and shifting it to the port of St Petersburg, it is by most metrics insupportable. And yet coal is also the largest employer in Central Siberia, so if you were to shut down the mines there, then the consequences for the regional economy and society would be cataclysmic.

It is another example of the way in which a combination of Russia’s size and history have dictated that its transport infrastructure is both unusual in kind, and unusual in complexity. The railways are not just a means of transporting goods from A to B, but are, rather, a three-dimensional economic instrument.

Even before the freeze, the tariffs we were allowed to charge had been too low to be economically prudent (at least as far as we were concerned, others benefited from our reduced prices). But what became clear in 2013 was that a decision had been made that other players in this intricate system were going to be privileged at our expense. While we were expected to somehow find a way of accommodating the devastating impact of the tariff freeze, no similar retrenchment had been asked of the coal and other industries. The savings we were being asked to find were being used to subsidise private enterprises that had evaded the squeeze altogether.

I am not economically illiterate; I could see the rationale behind this decision. With its rate of GDP growth falling, Russia had effectively entered into recession. Freezing tariffs was an attempt to reduce inflation and provide a spur to the economy. By reducing the cost of doing business, the cost of goods could be kept in check, something that it was hoped would put a bit more money into the pockets of consumers. At a time when concern was rising among the general public about the cost of living, and in the context of a presidency that had begun with protestors on the streets, this move also made a certain amount of political sense.

Personally though, I do not believe that taking an axe to spending is the right way to deal with a recession. For one thing, there was no guarantee at all that the private businesses that stood to benefit would necessarily invest the money back into the economy; they were just as likely to either keep it on their balance sheets, or decide to invest it in more stable markets abroad. I have lived long enough to know that private enterprises will always be guided by their own bottom line; they cannot be expected to tailor their strategy to suit the nation’s interests alone.

I believe a national problem demands national direction. I have always liked the example given by Wassily Leontief, the Russian-born Nobel Prize laureate, who used to say that the economy is like a yacht. If there is no wind, or ability to accrue profit, then the yacht will remain still. However, if the state does not provide a figurative map and compass to guide the yacht, the economy is bound to go in the wrong direction. The economy of the former USSR had lost all the wind from its sails, so it ended up becalmed. By contrast, one could argue that today the American economy has no direction. Neither of these is sustainable – there has to be a balance between private entrepreneurship and state control in order for the yacht to sail smoothly.

My own response to the recession would have been to pursue a programme of reindustrialisation. By embarking on large-scale state-funded infrastructure projects, creating an environment that would have encouraged entrepreneurs to invest, or providing tax incentives that offered private companies joint-financing to enable them to renew fixed assets in important industries, we would have been able to stimulate demand, reinvigorate our industrial base and give the economy the kick-start it needed.

Russian Railways was a case in point. Our operations contributed 1.7 per cent to Russia’s GDP in 2013; cutting the tariffs would only prejudice our chances of improving on or even matching this figure in subsequent years, and would have a malign effect on many other elements with the country. (By this stage, our manufacturing and infrastructure creation programmes had direct links to at least nineteen other sectors of the economy; if our ability to spend was restricted, then there would also be an impact on industrial enterprises throughout Russia.)

But nobody seemed to be listening to our arguments. In fact, it was around this time that the suggestion started to be made that, irrespective of the financial situation, the natural monopolies that were the victims of the tariff freeze were inefficient anyway and would all benefit from a spell of cost-cutting. Certain people began to mutter that we had had things easy for too long, that we had become accustomed to the good life, that we were just sucking up public money.

This, as much as anything else, convinced me that the whole policy was a purely emotional, political decision. We were, for instance, the only state-owned company, maybe even the only company in Russia, which was year on year increasing our efficiency by 10 per cent. The first deputy Prime Minister Igor Shuvalov had declared us the most efficient state-owned company. And yet here we were again, playing the role that the railways have had to assume so many times before: the scapegoat. (The railways have always been a convenient target for those looking for someone, or something, to blame. In the days of the Soviet Union, for example, party apparatchiks would always blame railway representatives when deliveries of fertilisers fell, wilfully ignoring the cyclical nature of the fertiliser industry.) The value we created was being cannibalised to subsidise the operations of private companies, and yet we were still being accused of inefficiency, or worse.

In one fell swoop, we would be going from a profit-making enterprise to one looking at a 90-billion-rouble loss on its balance sheet. One stinging consequence of all of this – something else that had not been anticipated by the policy-makers – was that while in the past we had had great success both in collaborating with foreign enterprises such as Siemans and Talgo, and with the Western financial system (by selling our bonds on the global market), the freezing of the tariffs made us less attractive to overseas investors almost overnight.

We argued fiercely, but without success, for the right to be able to introduce variable tariffs that would have allowed us to respond nimbly to changes in market conditions. If the price of coal went up, we would raise our tariffs accordingly. And, similarly, we could react to a drop in commodity prices by reducing our tariffs. Since Russian Railways is not the only cargo operator in Russia, our competitors (who are not owned by the state and thus have far greater leeway when it comes to setting their tariffs) could undercut us when prices were low. The arrangement that was foisted on us in 2013 represented the worst of both worlds, not least because, unlike the other cargo companies, we still bore a lot of the cost for maintaining and repairing the infrastructure.

As a last resort, in October 2013 we made an approach to the Ministry of Finance for extra subsidies, which we hoped to use to mitigate as far as possible the impact of the tariff freeze and allow us to maintain our investment programme. It was firmly rebuffed. We had made this move more in hope than expectation, but the definitiveness of the ministry’s response – the confirmation it brought that our chances of raising the money we so desperately needed had receded to an infinitesimally small point – was another crushing blow. (I have noted with some interest that my intuition then has been proved correct now, and the government, aware that it is unable to secure the income it needs from elsewhere, is using its reserves to invest in infrastructure programmes. This has not led, as I was warned it would, to increased inflation – quite the opposite, in fact.)