TRANSNATIONALS AND NATURAL MONOPOLIES IN CIS INTEGRATION PROCESSES
Oleg Rybkin, Deputy director, Department of Analysis of Economic Conditions for the Formation of a Free Trade Area, CIS Executive Committee
Sergei Kazanskiy, Section head, Department of Analysis of Economic Conditions for the Formation of a Free Trade Area, CIS Executive Committee
The unfavorable structure of internal exports in the Commonwealth countries and the sharp raw material bias in their industrial production are the main reasons behind the search for new economic-organizational forms of mutually advantageous interstate cooperation. These forms should help to make full and effective use of the existing prerequisites for interaction between the CIS member countries, such as their geographic and sociocultural proximity, their mutually complementary raw material, research and industrial bases, and their traditional production specialization and cooperation. Clearly, there is an objective economic need for the formation of common commodity markets in a wide range of industrial products, as well as raw materials, which can be achieved only through an integration of the industrial and financial capitals of the states concerned.
A major factor in raising the efficiency of economic cooperation among the CIS countries is the formation of a system of transnational corporations (TNCs) and financial-industrial groups (FIGs) geared to implement the industrial and social priorities of the member states, to develop mutually advantageous trade, and to form common commodity, financial, investment and other markets.
In the view of leading Russian economists (such as Academician-Secretary of the Russian Academy of Sciences D.S. Lvov), local national economies are gradually losing their self-development potential and are beginning to integrate into a single planetary economic organism with a universal regulation system usually described, from force of habit, as a market or free enterprise system. In actual fact, the world market has already been monopolized and strictly segmented by the biggest transnational corporations, which in their decisive part represent the interests of the so-called Golden Billion countries led by the top five powers: U.S.A., Japan, Germany, Britain and France.
An analysis of world experience in the development of common markets of goods, services and investments shows that despite an increase in the number of small and medium-sized enterprises making import investments, a large share of foreign direct investment is still concentrated in the hands of a few companies. Thus, the foreign branches of 100 leading TNCs (in terms of investment abroad) own a total of $1.7 trillion worth of assets, controlling one-fifth of global foreign assets.
For example, 25 U.S. transnationals account for one-half of all investments flowing out of the country, and this indicator has remained virtually the same during the past 40 years. In Australia, Canada, Finland, Norway, Sweden and Britain, 25 major transnationals account for more than one-half of all investments flowing out of these countries.
Global transnationalization trends should naturally be taken into account in the efforts to negotiate a strategy of economic interaction between the Commonwealth states. TNCs seek to fence off certain segments in different countries and, coordinating the activities of the newly formed enclaves, to set up their own, modified subsystems of international division of labor. Most of the rapid growth of international trade over the past decades is connected with the activities of TNCs, with transactions between their various divisions. Thus, whereas in the mid-1970s there were around 7 thousand TNCs in the world, by the end of the 1990s their number had risen to 40 thousand.
According to the U.N. Conference on Trade and Development (UNCTAD), in the late 1990s the foreign trade turnover of the TNCs was estimated at nearly $6 trillion, or virtually one-half of world trade. They control roughly two-thirds of high-technology sales and around 80% of financial markets, while free access of new technology to the markets of economically developed countries, as well as those of the CIS, is very limited. The world’s leading TNCs have over 200 thousand subsidiaries abroad, including two thousand in the Commonwealth countries.
The significant role of transnational corporations and financial-industrial groups in the development of production cooperation between economic entities located in the CIS countries and elsewhere is emphasized in many basic documents on economic cooperation between them, adopted by the CIS Council of Heads of State and Council of Heads of Government. Regrettably, full-scale analytical work in identifying potentially effective cooperation ties between enterprises in these countries has not yet got underway. That is why separate initiatives still prevail in the establishment of transnational corporations and financial-industrial groups. Meanwhile, such associations could do a great deal to invigorate export-import operations, improve their structure, ensure long-range and mutually complementary specialization and cooperation, and boost capital investment.
Depending on the specifics of their resource, scientific and production potential, the CIS states may act not only as host countries, but also as home base countries, and may resort to strategic alliances and to other forms of property and contractual integration. But all of this requires a more systemic approach to the conceptual analysis of the priorities of international cooperation and to coordinating the economic-organizational forms of their implementation, which would enhance the efforts of all the parties concerned. And in the establishment and operation of transnationals (with the participation of Far Abroad and Near Abroad countries), the parties should aim at a rational balance between the raw materials and manufacturing sectors of the national economy.
One should note in this context that the long-standing unfavorable structure of export-import operations within the Commonwealth shows an underestimation of the importance of concerted use of commodity market opportunities in the interests of the member countries’ balanced strategic development.
Today it is generally acknowledged that transnational economic structures of the CIS attach priority importance to the formation of common markets of manufactures through an integration of the industrial and financial capitals of the countries concerned. This is due to the traditional pattern of specialization, the high level of industrial cooperation between the Commonwealth countries, and objective economic need.
The first ten years of CIS existence have seen the emergence in the Commonwealth countries of a number of successfully operating transnational corporations and financial-industrial groups, including interstate financial-industrial groups (IFIGs) set up under intergovernmental agreements. These include Interros (On Cooperation Between Enterprises and Organizations of Russia and Kazakhstan in the Field of Ferrous and Nonferrous Metals, Petrochemicals, Mineral Fertilizers and Other Raw Material Products, 9 September, 1994); Mezhdunarodnye Aviamotory (On Cooperation Between Enterprises and Organizations of Russia and Ukraine in the Aeroengine Industry, 21 March, 1995); Elektrometpribor (On Cooperation Between Enterprises and Organizations of Russia and Kazakhstan in Electrical Engineering and Instrument Making, 27 April, 1995); Iliushin (On Cooperation Between Enterprises and Organizations of Russia and Uzbekistan in Aircraft Manufacturing, 27 July, 1995); Aerofin (On Cooperation Between Enterprises and Organizations of the Commonwealth Countries, except Turkmenistan, in Aircraft Exploitation and Repair and in Arranging Air Transportation, 18 October, 1996); Granit (On Cooperation Between Enterprises and Organizations of Russia, Armenia, Belarus, Kyrgyzstan and Tajikistan in Antiaircraft Defense, 18 October, 1996); BelRusAvto (On Cooperation Between Enterprises of Russia and Belarus in Automobile and Engine Manufacturing, 1 October, 1997); Mezhgosmetiz (On Cooperation Between Enterprises of Russia and Belarus in the Production of Special Types of Metal Products, 23 July, 1998); Elektronnye Tekhnologii (On Cooperation Between Enterprises and Organizations of Russia and Belarus in the Development and Manufacture of High-Technology Electronic Products, 28 August, 1998); Formash (On Cooperation Between Enterprises and Organizations of Russia and Belarus in the Development and Production of Equipment for the Manufacture of Chemical Fiber and Yarn, and for Processing Flax, Wool, Cotton and Other Agricultural Raw Materials, 16 October, 1998); Interagroinvest (On Cooperation Between Enterprises and Organizations of Russia and Belarus in the Production of Potash Fertilizers with the Participation of Firms from Austria, Latvia, Singapore and Switzerland, 6 October, 1998); and Oboronitel’nye Sistemy (On Cooperation Between Enterprises of the Russian Federation and the Republic of Belarus in the Manufacture of Military-Technical Products, 11 February, 2000). In the latter case, the earlier registered Russian FIG (with the same name) is being converted into an interstate corporation: steps are being taken to include Belarus enterprises and to amend the agreement on the establishment of the group.
In view of mismatching legislation, some interstate financial-industrial groups have not yet been properly formed. This applies, first of all, to groups with the participation of Kazakhstan enterprises (Interros and Elektrometpribor).
Nevertheless, work in the establishment and further development of transnational economic ties both with Far Abroad and Near Abroad countries is going on. A tangible contribution to this process is being made by entities of diverse legal-organization form operating in the fuel and energy, transport, machine-building and other complexes.
For example, Russia’s Gazprom supplies its products to eight Commonwealth countries and 16 countries of Western and Eastern Europe, ensuring strategic partnership with leading foreign companies. Gazprom exploits around 80 gas and gas condensate fields and 150 thousand km of gas trunk pipelines, and supplies gas to the CIS countries under intergovernmental and interstate agreements. It has taken part in the establishment and operation of Itera, an international company with 120 affiliates in Russia, Ukraine, Belarus, Turkmenistan, Kazakhstan, Latvia, U.S.A., Switzerland and other countries. Apart from exporting gas, this company has also started its production both in Russia and in other countries.
In the structure of Russia’s oil sector, there is a prevalence of vertically integrated oil companies, such as LUKoil, YUKOS, Sidanko, Vostochnaia NK and Rosneft. The state does not have a majority interest in any of these companies; only in Rosneft its stake has reached 49%.
The global strategy of LUKoil, which accounts for a sizeable share of oil production in Russia, is to transnationalize its activities and aim at international competitiveness. This company has set up a wide network of joint ventures and subsidiaries in Azerbaijan, Belarus, Georgia, Lithuania and Ukraine. It also has subsidiaries in Ireland (LUKoil International Ltd.), Israel (LUKoil -Israel), Argentina (LUKoil International Inc.), the Czech Republic (LUKoil -C & S and Trust-Contact) and Cyprus (LukTransShipping), and is a party to the production sharing agreement on the Karachaganak field (northwestern Kazakhstan) with a share of 15%. The company carries on surveying work in the CIS countries, including the territory of Kazakhstan and the Caspian Sea sectors of Azerbaijan and Turkmenistan. As a result of these activities, oil exports to the Commonwealth countries have been growing.
An analysis of the production results of these and other transnationals shows that the most promising lines in the activity of TNCs and IFIGS in the fuel and energy complex are as follows: exploration and development of fields on the terms of production sharing agreements, notably in border areas; projects for the construction of new electric power stations and renovation of power generation facilities on the basis of the CIS countries’ production potential; production and sale of energy resources in CIS and Far Abroad markets; development, manufacture and introduction of new technology and equipment; renovation and upgrading of the coal industry in the CIS countries in order to obtain high-energy fuel as required by the power industry and metallurgy; establishment of investment companies to modernize and renew fixed assets, including a sectoral interstate bank for the fuel and energy industry to help resolve problems of payment for delivered energy resources.
Apart from the interstate FIGs and TNCs mentioned above, various transnational financial-industrial groups have been set up under direct agreements between their participants (without any intergovernmental agreements). These include Nizhegorodskie Avtomobili, Tochnost, Slavianskaia Bumaga and Optronika.
Interstate and transnational FIGs established in the Commonwealth have brought together around 300 economic entities with different forms of ownership. They operate in the automotive industry, in general and electronic engineering, in the chemical industry, metallurgy and the agroindustrial complex.
As an example of cooperation in the development, manufacture and sale of motor vehicles and farm machinery, and also in consolidating the single economic space, one could refer to the activities of the joint-stock company Avtoselkhozmash-holding (AO ASM-holding). Its shareholders, based in the CIS and Baltic countries, are enterprises and organizations in automobile manufacturing, agricultural engineering and the tractor industry, and also in related industries supplying components and materials for this machinery. The holding company includes around 170 economic entities with different forms of property, 105 of them in Russia, 22 in Ukraine, and 13 in Belarus. To help its enterprises and organizations establish and strengthen business and technological ties, to develop cooperative deliveries and ensure timely payments, and also to enable its Executive to interact with its shareholder enterprises and with the respective ministries and departments, the holding company has opened its representative offices in all the Commonwealth countries, and also in Latvia and Lithuania. In order to carry on comprehensive marketing research in the CIS countries, to study current and future demand for its products and to promote their sale, the holding company has set up a Coordinating and Marketing Center. Since it came into existence, the Center has organized a dealer network (over 70 dealers) covering most regions of the CIS.
An Arbitration Court operating within the holding company’s Executive handles business disputes between shareholder enterprises. Legal costs at this court are half as high as at state arbitration courts. The holding company has taken part in the establishment of around 50 entities, including joint-stock companies, banks, an investment company, a check investment fund, etc.
Nizhegorodskie Avtomobili, a financial-industrial group which includes plants in Russia, Tajikistan and Ukraine, has also been set up under direct agreements. The plants produce over 20 kinds of products: trucks and passenger cars, buses, specialized vehicles, refrigerated trailers, crawler tracks, car engines, tires and general mechanical rubber goods, assembly units and components. In 1998 (despite the August financial crisis), output at the corporation’s plants was 3% higher than in 1997 (in comparable prices), with AO GAZ - the group’s principal enterprise - increasing its output by 10.9%. Since 1999, the corporation has been expanding its effective network of assembly plants turning out GAZ vehicles, and also its networks of dealers and representative offices in Uzbekistan, Tajikistan, Turkmenistan, Kyrgyzstan, Moldova, Armenia, Georgia and Azerbaijan. Its regional directorates focus their attention on developing certified manufacturing and aftersales service networks in local sales markets, coordinating the work of dealers, launching advertising campaigns, and following a concerted pricing policy.
The purpose of the BelRusAvto transnational corporation is to implement the Russian-Belarus Program for the Development of Diesel Automobile Manufacturing. The idea is to ensure that the BelAZ-7555 off-highway dump trucks with Yaroslavl-made 730 hp YaMZ-745 diesel engines meet the best world standards, but at prices that are 25-28% below those of similar foreign-made trucks. The corporation has also been working to form and develop an aftersales service network for its products across the CIS.
The Slavianskaia Bumaga transnational corporation includes pulp and paper, light and chemical industry plants in Belarus, Russia and Ukraine with over 25 thousand employees. Efforts to arrange intracorporate ties have yielded an additional $1.5m worth of current assets, which has made it possible to markedly invigorate the production process.
In order to develop cooperation between producers of carpet goods and suppliers of raw materials for their production, in June 1998 a number of enterprises in Belarus, Moldova, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan and Ukraine founded a transnational corporation called Kovry SNG, and in October 1999, the heads of government of the CIS states signed an agreement on its establishment. The corporation includes 14 factories producing carpets and carpet goods, two plants making chemical fiber and yarn, three cotton and wool factories, and a Specialized Textile Engineering Bureau. The establishment of such a corporation will enable enterprises in the industry to coordinate their marketing and technical policies and will help to develop cooperation between suppliers of raw materials and carpet manufacturers, and also to build a common market for their products.
The successful operation of these and many other transnational corporations and interstate financial-industrial groups shows that discrepancies in legislation, uneven pace of economic reform and different legal-organization forms of ownership in the Commonwealth states should not be seen as insurmountable obstacles in the process of TNC formation. Where the parties have a real stake in international integration, the effect of these factors may be reduced through individual approaches to the establishment of concrete groups of related enterprises.
However, despite the efforts being made, the overall impact of corporate associations on Commonwealth integration processes is still insufficient. First, the development of transnationals is held back by discrepancies (sometimes even with elements of incompatibility) between national legislations and the regulatory framework for the establishment of TNCs. Thus, not all countries of the Commonwealth have adopted the Convention on Transnational Corporations. Second, the large number of ratified interstate documents does not compensate for their declarative nature or for the fact that they resemble mere letters of intent. Interstate agreements on the establishment of TNCs do not usually specify the concrete terms and conditions of financial and economic interaction between the group’s participants or contain well-grounded measures of interstate regulation and support of their activities. Third, there are still no uniform rules of TNC registration or preparation of feasibility studies for their establishment. Some Commonwealth states, having developed a national legal framework for the establishment of financial-industrial groups, including groups with the participation of foreign entities, have not specified the requirements for feasibility studies on the establishment of TNCs. A serious flaw in the existing practice of interstate cooperation on TNC problems is lack of a definite stand among the CIS countries as regards the content and structure of intergovernmental agreements on the establishment of concrete corporate associations.
In addition, trade and industrial cooperation is adversely affected by the ill-adjusted rules of financial-settlement relations between economic agents, by the sizeable gap between the official exchange rates set by national banks and market exchange rates, all of which tends to disrupt the joint work of banks and their clients and hinders financial settlements under cooperative deliveries. There is still no properly working multilateral clearing system (for mutual offset of liabilities through the CIS Interstate Bank), and many issues relating to the Commonwealth countries’ debts for Russian energy resources, to regulation of mutual deliveries at the internal prices of the producer countries, and to charging and collecting VAT on foreign trade operations have yet to be resolved.
The slow progress in the formation of TNCs is also connected, beyond any doubt, with the urge of economic agents to earn hard currency, with lack of due trust between the partners, and also with the fact that the highest authorities in the CIS countries have given virtually no real support to interstate corporate associations.
Special mention should be made of the tough resistance to a consolidation of Commonwealth capitals on the part of powerful corporations from Far Abroad countries (especially in the most profitable areas of business: energy, metallurgy, production of food and other goods).
To regulate operations on the CIS financial market and to introduce uniform international standards, an International Association of Exchanges of the Commonwealth countries was set up in April 2000. It includes 16 exchanges in eight countries: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Russia, Tajikistan and Ukraine. Its main purpose is to promote the formation of a single exchange space with the use of the latest exchange business technologies, and also to normalize the flow of funds in national currencies between the CIS countries, introduce international standards of trade in securities, ensure mutual recognition of registration of securities issues, and develop a single capital market and a single exchange space.
So, a pooling of financial resources and concentration of property rights in the CIS countries markedly expands the investment possibilities of TNCs and IFIGs in pursuing a common technical, structural, marketing and financial policy, facilitates effective management of resources, and helps to concentrate them in the most important areas.
So-called “natural monopolies” have also made a tangible contribution to integration processes. For example, major issues relating to rail transport are coordinated by the Rail Transport Council, which initiated the conclusion (on 22 March, 1993) of an intergovernmental Agreement on the Joint Use of Freight Cars and Containers of the Commonwealth States, and Also of Latvia, Lithuania and Estonia. This document provides for joint exploitation of freight cars and containers in interstate rail communications, ensuring their effective use and proper maintenance, safe movement of trains, receipt and dispatch of cars at transfer stations jointly with customs, law enforcement, sanitary and other agencies and organizations in accordance with an agreed comprehensive procedure, and development and equipment of these stations with modern technical facilities.
As a result of the measures taken, the railroad infrastructure of the CIS states is being jointly used to carry passengers and cargo, subject to a single set of Railroad Operating Rules, Signaling Regulations, Train Operation and Shunting Regulations, a single train makeup plan and a single train schedule. Train movements throughout the Commonwealth states, Latvia, Lithuania and Estonia are coordinated from a single control center run by the Rail Transport Council’s directorate, which ensures the process integrity of the railroad network. A special system of accounting and settlements for the use of freight cars belonging to other states is in operation.
The principles of setting rail tariff rates designed to ensure free movement of goods across CIS territory take due account of railroad operation in market conditions and are in line with international rate setting standards.
Owing to a concerted solution not only of current, but also of long-term transport development problems, tariff policy has undergone insignificant structural changes, which has made it possible to maintain base tariff rates in the CIS and the Baltic countries virtually on the same level during the past four years. This is one of the main advantages of CIS railroad operation on the international transportation market under a concerted tariff policy, making it possible to sign long-term contracts for cargo shipments in international rail communications.
The aircraft industry is yet another area requiring interstate cooperation of enterprises. The most widespread form of such cooperation is leasing of aircraft and aviation equipment. Among the companies successfully operating in this market are those of the Leader groups: ZAO Inkom-Avializingovaia Kompania and ZAO FinAvia, two closed joint-stock companies within the Aircraft and Aviation Equipment Leasing Committee (SNGAVIALIZING). Since January 1998, these companies have put into effect three interstate aircraft leasing projects: one TU-154M (for three years, transaction amount - $5.8m) was leased to the Belavia National Aviation Company (Belarus), and two YaK-42D liners went to the Krym aviation company (one for 3.5 years, transaction amount - $6.75m, and the other for five years, transaction amount - $7.75m).
There are also various other and no less important lines along which economic integration could be deepened through the implementation of joint projects and programs in the form of TNCs, IFIGs and enterprises of other legal-organization form.
Today it is clear that faster progress in the formation of TNCs in the post-Soviet economic space calls for integrated approaches resting on a long-term view of globalization problems and on the political will of the interacting states. So, with due regard for the above, their joint regulating efforts could be directed along the following lines.
First, national government documents of the Commonwealth states formulating their foreign economic strategies should include special sections on the integration activities of the states concerned. The main task here is to coordinate and harmonize work on these sections so as to develop nonconflicting economic mechanisms helping to meet common socioeconomic interests. The partners should clearly determine the “areas” (parameters, limits) of these interests and set up motivational and protective mechanisms: customs, monetary and financial, tax and others. This would ensure real, rather than declarative, foreign economic (and foreign policy) conditions for the emergence and development of TNCs and for making them more competitive.
Second, the formation of large transnational business entities should rely on interstate forecasts and on bilateral, trilateral and multilateral programs of foreign economic activity enjoying high government status. Such documents should set the priorities for industrial cooperation and help to shape common economic interests and areas of division of labor on a voluntary market basis. The implementation of these programs could be vested in actually operating and projected corporations. The important thing here is that such interstate programs should provide for measures to create a favorable economic environment required for the work of TNCs pursuing priority lines of mutually advantageous production cooperation, and should help to reduce the high noncommercial risks intrinsic to the activity of transnational corporations.
Third, it would make sense to enhance the role of the state in regulating the activities of TNCs.
Fourth, TNCs should evidently be formed on the basis of joint (matching) industrial priorities, whose identification is an essential element in drafting interstate programs of economic cooperation.
Fifth, considering the far from simple economic situation in the CIS countries and numerous internal and external difficulties on the way to the establishment of effective TNCs, it is highly important to find opportunities for activating mechanisms to provide government resource support for priority projects of joint production activity. A positive example here is set by the Union of Belarus and Russia, most of whose budget is used to support joint programs. Thus, for the implementation of the Electronic Plastic Card interstate program (contractor - Elektronnye Tekhnologii IFIG), BelRusAvto was allocated over $20m in 1999-2000 and around $3m in 2001.
For the resource support of TNC projects, it is also advisable to build up and make more efficient use of the potential of the CIS Interstate Bank. Under bilateral and multilateral international agreements, the CIS countries should set up hypothecation mechanisms for attracting foreign investment required to implement priority industrial projects. Such arrangements, which are being tried out, in particular, within the system of Russian-Belarus economic cooperation, require a clear definition of state-owned liquid assets and natural resources which may be used as collateral security (objects of intellectual property, reserves of coal, oil, gas and precious metals, forest lands, etc.); issue of government securities (bonds) for the amount of collateral recognized by the foreign investor as sufficient for attracting resources to long-range projects subjected to a competent expert review (securities are transferred to authorized banks; the amount of each country’s collateral is determined with due regard for the specifics of concrete projects); extension of credits by the authorized bank (out of investments made by participating enterprises) for joint industrial projects, and also repayment of bonds on the basis of commercial realization of implemented projects.
The establishment of interstate (transnational) corporations and financial-industrial groups in the CIS is the most reliable and effective mechanism for strengthening the national economic potential of each state and of all the member countries as a whole, and also for tapping into new commodity markets. These companies and groups are meant to ensure intensive market circulation of products and financial resources.
Among the main lines of activity of these associations one could single out the following: development of new and strengthening of existing cooperation ties between shareholder enterprises; arrangement of mutual settlements and assistance to shareholder enterprises in payment for material and technical resources and for provided services; comprehensive marketing research in the Commonwealth states and in third countries; assistance in developing investment projects and in the search for funds to finance these projects in order to build new and modernize existing facilities for manufacturing modern competitive products; systematization of legislative acts and regulatory documents in taxation, customs relations, privatization and other areas in accordance with shareholder requests; strengthening of business links with firms of economically developed countries of America, Europe and Asia; arrangement of international exhibitions, conferences and roundtables, advertising and publishing activities.
To sum up, the establishment of transnational corporations, financial-industrial groups and joint ventures is objectively aimed at strengthening integration processes in the CIS economic space. Their development will help to boost output, upgrade the quality of goods and services, reduce production costs, raise profits, protect the environment and increase investments in the interests of all the CIS states.