Does Nationalization Work

Does Nationalization Work?

Evidence from Russian State Takeovers

Carsten Sprenger

International College of Economics and Finance,

State University – Higher School of Economics Moscow

This draft: November 9, 2009

Abstract

There is the recent trend toward more state influence in certain sectors in the Russian economy. We study the related incidence of nationalizations, in most cases the purchase of previously privatized companies by state-owned enterprises and its effect on the performance of the acquired firms. To this end, we construct a database of nationalization deals in Russia for the years 2001-2008. Apart from the overall effect on performance we investigate some of the mechanisms through which state ownership may affect company performance, in particular the access to soft loans, changes in financial leverage, the composition of the board of directors, and changes in the top management.

Introduction

Despite the mass privatization and subsequent privatization programs in Russian during the 1990’s, state-owned enterprises (henceforth, SOEs) are still important in the Russian economy. This phenomenon is not specific to Russia – one can observe in both developed and developing countries that a number of oil firms, banks, and parts of the infrastructure sectors are controlled by the government. A more specific feature of the Russian economy is the recent trend toward more state influence in certain sectors in the economy and the related incidence of nationalizations, in most cases the purchase of previously privatized companies by SOEs. Neshadin et al. (2007) single out five sectors that are dominated by SOEs: infrastructure (railway transport, pipelines, communication, nuclear energy), extraction of natural resources (oil and gas, diamonds), the military-industrial complex, financial services, and mass media. The Russian government gives several objectives of taking ownership positions in various sectors of the economy: the modernization of infrastructure, the diversification of the economy by attracting investments in high-technology sectors, innovation, and the creation of large vertically integrated structures that can survive the international competition.

While there are several studies on the privatization process in Russia, there is almost no systematic research about the performance of remaining and newly established SOEs in Russia. The issue of performance of SOEs is however of great importance since it is a precondition to achieve any of the above mentioned industrial policy goals.

This is paper is part of a research project on the relative performance of Russian state-owned enterprises. Such a performance evaluation can be done in three different ways:

1. One can estimate the effect of ownership on various measures of performance for a large panel of Russian firms over several years (approx. from 1999-2008, subject to data availability). To do this one can apply standard econometric methods such as multiple regressions controlling for other potential impact factors such as industry affiliation and firm size.

2. Alternatively, one can choose for each state-owned company in the sample a privately-owned peer that matches the SOE as much as possible in its industry affiliation, size, location and other parameters and compare their performance.

3. Another interesting approach is to look at nationalizations, i.e. changes in ownership from private ownership to state ownership and compare the performance of the same company before and after nationalization controlling for industry and macroeconomic variables that affect all firms in the economy.

In this study we pursue the latter approach. It seems that since the beginning of this century a sufficient number of state takeovers has taken place to employ the tools of econometric analysis. Looking at nationalization transactions also seems interesting because this is a novel approach to the study of the comparative performance of SOEs. In a first stage, we will present descriptive statistics on the importance of the phenomenon of nationalization in several industries.

Performance can be measured by a variety of indicators; both based on accounting measures (e.g. return on assets), productivity (e.g. sales per employee, or if data allow to estimate production functions, total factor productivity), and, where available, based on market valuations (e.g. Tobin’s Q).

We use the definition of SOEs given in the OECD Guidelines on Corporate Governance of State-owned Enterprises (OECD, 2005b): SOEs are enterprises where the state has significant control, through full, majority, or significant minority ownership. We refer to state control at any level of government and through pyramid structures, i.e. direct and indirect ownership of the federal government, regional and municipal governments. Accordingly, under nationalization we understand the transfer of control over a company from a private person or entity to the state or an SOE.

Literature Review

In this section, we review the relevant empirical literature on the comparison of state-owned and privately owned enterprises. There are two main strands in this literature, one focuses on the performance effects of privatization, and the other performs cross-sectional comparisons of SOEs and private firms while controlling for other performance drivers. The literature on the effects of privatization in Central and Eastern Europe and the former Soviet Union has been summarized in two excellent surveys by Djankov and Murrell (2002) and Estrin et al. (2009).1 While in Central and Eastern Europe privatization typically brought improvements in technical efficiency (labor productivity, total factor productivity) and financial performance, the effects for the countries of the former Soviet Union are less clear. For example, Brown and Earle (2006) find positive effects of privatization on total factor productivity in Romania, Hungary, Ukraine. The effect for Russia is positive or negative depending on specifications, but in any case smaller than in the other three countries. In addition, any positive performance effects of privatization need more time to materialize than in the other countries.

In a recent study on a large sample of privatization deals in China, Bai et al. (2009) find that privatization of China’s SOEs had almost no effect on employment in the medium run, but it increased labor productivity and firm profitability. These changes were more pronounced when state ownership was reduced to a minority position.

Since there have not been any major privatization steps in Russia in recent years, the study of the relative performance of the currently existing state-owned enterprises in Russia compared to their private counterparts will necessarily have to draw heavily from the second strand of research that uses a cross-sectional approach.

The comparative analysis of state-owned and private enterprises in developed countries has lead in most cases to the conclusion of superior performance of private firms (e.g. Boardman and Vining, 1989), but in some cases no significant difference has been found (e.g. Kole and Mulherin, 1997). Recent studies for China however question the general conclusion of the inferiority of state ownership. Both Tian and Estrin (2008) and Chen et al. (2009) conclude that state ownership can have a positive effect on corporate performance. Tian and Estrin (2008) find a positive effect of state ownership if it exceeds a certain threshold level (approx. 25% if performance is measured by Tobin’s Q). Chen et al. (2009) show that SOEs affiliated to the central government outperform private companies and companies with other forms of state ownership. The authors conclude that the government may be an effective owner in countries with a weak institutional environment.

What is clearly missing is a systematic study of the comparative performance of Russian SOEs using recent data. There is some research on the related topic of corporate governance in Russian SOEs based on survey data (Avdasheva et al., 2007 and Yakovlev, 2008). I will consider corporate governance as one of the main mechanisms through which ownership can affect the performance of a company. A cross-sectional comparison of SOEs and private companies can benefit from the methodological advances in the papers cited above, while an analysis of nationalization transactions as we aim to undertake it can mainly use the methodology of the literature on the performance effects of privatization.

Work on a database on nationalization transactions

At the present stage we have dedicated our efforts mainly to the search of data on nationalization deals in Russia for the period 2001-2008. One source of data on takeovers by state-owned enterprises are articles in the business press and in Russian academic journals, for example a series of articles in Kommersant Den’gi on nationalization efforts of the Russian government in several sectors (Pappe and Drankina, 2007), as well as Neshadin et al. (2007) and Radygin (2009). For the creation of a complete database of nationalization deals we use the data bases Zephyr and Ruslana (Bureau van Dijk). Zephyr contains information on mergers and acquisitions, IPOs and joint ventures around the globe. In Ruslana, there is information on more than 1.5 million Russian and Ukrainian companies. We extracted a list of domestic acquisitions by Russian companies from Zephyr and a list of SOEs from Ruslana. With the help of the list of SOEs we filtered out all acquisitions that were made by SOEs. A practical problem here is that the company names may slightly differ. Next, we exclude deals where also the target was an SOE, i.e. pure consolidations of state property. As a result, we have a preliminary database of around 100 nationalization deals, which is sufficiently diversified across sectors.

Conclusion

Using our database and the analytical material of Russian business press and academic journals, one can say that nationalization has been a quantitatively important feature of the Russian economy in the last decade. For the analysis of its effects on company performance, we need to collect also financial statements of target companies before and after the nationalization. In addition, we would like to highlight some of the mechanisms through which state ownership may affect the performance of companies, namely

the size of the ownership stake of the state, which might be important for the actual distribution of control within the firm,
whether or not there has been a change in the top management around the nationalization transaction (and whether the management kept a stake afterwards)
the composition of the board of directors (independent directors vs. state representatives voting according to previously determined directives),
which state agency fulfills the ownership function of the state,
whether a company has become a part of a state holding, e.g. one of the recently created State Corporations
whether financial leverage of nationalized companies increased, whether the sources of financing change towards state-owned banks or whether firms receive direct subsidies.

1 For evidence on privatization around the world see the survey of Megginson and Netter (2001).

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Does Nationalization Work