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

Abstract The narrative that defines privatisation, corporatisation, and the separation of ownership and regulatory functions as the key prerequisites for a successful state-owned enterprises’ (SOE) governance structure represents the literature's leading approach. This approach has been embedded in national laws and policies across many countries. Nonetheless, some legal scholars have scrutinised and questioned this single-minded perspective, emphasising the impact of existing institutional conditions and calling for an alternative understanding of corporate governance dynamics in different SOEs. Notwithstanding a vigorous debate on SOEs, it almost exclusively focuses on China, while Russia, being another large state-driven economy, has been missing. This article fills this gap and offers a comparative and critical perspective on the state ownership system in Russia. The analysis of Russian SOEs reveals classic governance and incentive problems attributable to state ownership. However, the question is how despite close affiliation to the State and high transaction costs caused by state interference, Russian SOEs have gained a substantial international market presence. This article answers this paradox.

governance structure represents the literature's leading approach. This approach has been embedded in national laws and policies across many countries. It is the core principle of the Organisation for Economic Co-operation and Development (OECD) Guidelines that explain the overall objectives of a solid SOE framework and strongly advise countries on how to manage their SOEs effectively. 2 The dominant concept prescribes the single corporate regime, and almost entirely focuses on corporate SOEs run on a commercial, for-profit basis. 3 Nonetheless, some legal scholars have scrutinised and questioned this single-minded perspective, emphasising the impact of existing institutional conditions and calling for an alternative understanding of corporate governance dynamics in different SOEs. 4 Despite a vigorous debate on SOE governance, it almost exclusively focuses on China, 5 while Russia, being another large state-driven economy, has been overlooked. 6 This article fills this gap and contributes to the literature by offering a comparative and critical perspective on the state ownership system in Russia. In 2019, Russia was among the top twenty economies by foreign direct investment outflows. 7 Russia's SOEs represent one of Moscow's main channels of political and economic influence, 8 and are among the world's most powerful companies in the extractive sector primarily. 9 The analysis of Russian SOEs reveals classic governance and incentive problems attributable to state ownership. The question is how despite close affiliation to the State and high agency costs caused by state interference, Russian SOEs have gained a substantial international market presence. This article answers this paradox by offering several new insights: first, reasons for the existence of the current state ownership system. Second, the evolution of this system. Third, the rationale behind the system that appears costly but gives rise to the world's largest companies. And fourth, the extent to which the system relevant to other models and particularly China, which is the well-studied example of a politically managed state-driven model.
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. 10 Most international experts and academics who studied Russia at the dawn of its 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. 11 Today, Russia has been demonstrating the opposite tendency of the 'reverse' transition, establishing formal institutions that reinforce the State's growing influence.
The analysis of the most recent forms of Russian 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 and the separation of ownership and regulatory functions. 12 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.
The remainder of this article will proceed as follows. It begins with an overview of the contemporary SOE governance literature. The course of legal and corporate governance reforms in Russia are then examined. The article provides the context behind Russia's institutional and economic changes. Next, it analyses different forms of SOEs and scrutinises Russia's state ownership system, its management, and performance. The article grasps the rationale behind the existing system and its relevance to other models, particularly China's. It explores numerous Russian sources that have mostly remained unfamiliar to the international academic community but provided their own scholarly perspective on this topic of global consequence. The article concludes with the call for additional studies.

Theoretical Narrative
SOEs are important actors that often shape the institutional landscape and implement regulatory regimes in their home countries and beyond, giving rise to debates on an alternative approach to development. 13 However, state ownership causes several major challenges, including political considerations, multiple objectives, and the absence of an effective owner. 14 These challenges raise concerns about limited autonomy, politicised decision-making, weak profit incentives, and inefficient performance management. 15 As an institutional response, the mainstream approach recommends a sound legal framework that typically means bringing SOEs under a country's company law. The main idea is to expose SOEs to transparent market competition that demands an explicit separation between ownership and management, ownership, and regulation. This approach gives SOEs a higher degree of operational autonomy and managerial flexibility, while requiring SOEs to go through the process of commercialisation and corporatisation. 16 In particular, the OECD Guidelines prescribe several key measures. 17 First, countries should simplify and standardise SOE legal forms by synchronising them with commonly accepted corporate forms and practices existing for private firms. The second step is the centralisation of the state ownership function under a single agency or entity, which, in turn, should be accountable to the legislative body. Third, the OECD Guidelines call for an independent and professional board that acts in the company's interest and is subject to the same legally enforceable duties as the board in a private company. Finally, SOEs are strongly encouraged to maintain adequate transparency and disclosure to allow investors, customers, and independent auditors to monitor important financial and operational information. 18 The idea behind these recommendations is to introduce a corporate governance regime that disciplines directors and managers and establishes a clear separation of ownership and regulation. It attempts to constrain state interference and promote the principles of higher market value and cost-efficiency. 19 However, corporatisation is not a perfect recipe that automatically leads to better SOE performance. Corporatisation does not necessarily guarantee better performance when soft budget constraints, political interference, and insufficient markets still exist. To make the system work, countries should implement a series of complex institutional reforms accompanied by the mindset 13 Along with China, the newly industrialised economies of East Asia have been widely cited to refer to the role of a strong developmental state. shift among government officials and SOE managers. As a result, the real effect of corporatisation varies from country to country, and from an SOE to an SOE. 20 Another legitimate question is whether the single regime should govern various legal forms of SOEs with different goals. Most of the studies tend to apply the lens of the single corporate governance model and focus on its benefits. The single regime is deemed to mitigate SOEs' unfair competitive advantage and increase their value by applying standards and norms similar to private firms. 21 However, this concept does not pay sufficient attention to whether those standards are relevant to the nature of SOE's agency problems, their actual allocation of powers, and the overall quality of governance institutions in a particular country. 22 The empirical studies of SOEs demonstrate no 'one-size-fits-all' approach and no universal governance practice. The choice of an applicable framework depends on the context of an individual country or even an individual SOE. This means that for their successful application, the best governance practices should adapt to and corresponds with an existing socio-economic and legal context. Otherwise, the adverse effect of ignoring the context can disrupt SOEs' performance and bring about a significant risk for the sustainability of state-driven economies. 23

Background and Legal Framework
Corporate governance evolution in Russia Corporate governance has been broadly discussed throughout the entire history of post-Soviet Union Russia. 24 As the Russian markets and legal landscape evolved, companies were facing 20 Jeffrey N Gordon, 'Convergence and persistence in corporate law and governance', in Jeffrey Gordon & Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford University Press 2018) 28-29: 'For example, imagine a governance regime dominated by blockholders that include 'affiliated' directors placed by the large bank that provided debt finance, and the lead underwrites of the company's public equity. These affiliated directors would have institutional backing for their efforts to check private benefits extraction and the misrepresentation of performance. Adoption of the convergent governance standard in favor of "independent" directors rather than affiliated directors would likely undercut the monitoring capacity of the particular national system. Independent directors would be an efficient substitute only if the domestic court system became robust enough to control private benefits extraction and the domestic securities regulation system became robust enough to protect against fraud. Substitution of the convergent standard without regard for these institutional complements could result in companies that are less efficient and compete less well in global markets.' 21 See OECD (n 2). 22 Referring to China as an example, Donald Clarke argues that the traditional concept of the unity of ownership and control was not the one which have contributed to SOE inefficiency since it has never been an issue per se: 'Ownership was in the hands of an abstract entity, the state, whereas control was (and remains) necessarily in the hands of human beings. Whether those human beings are labeled state officials or enterprise managers, they are not owners, and therefore pose the same principal-agent problems that arise whenever managers are not owners. Thus, the problem with the cure is that it sees the separation of ownership and control as a benefit to be actively pursued, not as a costa necessary cost, to be sure, inherent in any large undertakingto be minimized. '  different issues. Along with economic modernisation, the corporate governance framework and company law were developing relatively quickly and often fragmentarily. The role of corporate governance transformed due to macroeconomic factors, institutional changes, and legal reformsall of which have contributed to the Russian corporate governance model. The overview of existing literature roughly distinguishes several stages of the evolution of ownership and corporate governance in modern Russia. Each stage demonstrated particular characteristics and trends triggered by institutional, political, and economic shifts that took place over those years. 25 The first stage is typically associated with the initial privatisation program and structural reforms introduced in the early 1990s. The main body of studies around that period focuses on the privatisation of state property and its outcomes. 26 They emphasise the lack of institutional conditions for the new privatisation policy to become successful. 27 In the early 1990s, there were no legitimate, effective, and transparent corporate governance practices and laws. 28 As a result, the ownership of privatised companies became locked in the hands of insiders with the real power exercised by management. 29 Employees could not fully appreciate the benefit of being shareholders because of the absence of liquid securities markets and adequate property rights protection. 30 When managers obtained the status of dominant or single shareholders, ownership, and management merged. The shareholding concentration produced strong managerial power, non-transparent decision-making processes, self-dealing, and the weak legal protection of a very few remaining minority shareholders. 31 The mid-1990s finalised the concentration of shares in large blocks held by the single The generally known concept called 'the Washington Consensus' requires transition economies, including Russia, to adhere to a strong orientation toward a market-based economy. It focuses on minimising the government involvement since a country's economic growth can be ensured only by free and open markets. Those markets considered to be achieved through full privatisation and opening-up the domestic economy for trade and investments. In this regard, transitional countries have been strongly encouraged to adopt institutions that call for deregulation and significant privatisation. Further, the International Monetary Fund, the World Bank, and other international organisations have evaluated corporate governance in transition economies from the perspective of their formal compliance with the best standards with little attention to whether these arrangements would effectively operate and carry out their anticipated functions in terms of transition. shareholder or a group of shareholders, who primarily relied on internal capital resources. That stage can be marked with the launch of the new Civil Code of 1994, followed by the new laws on joint-stock companies of 1995 and limited liability companies of 1998. 32 Those laws represented the first attempt to design a legal basis for corporate governance in Russia. 33 The second stage commenced in the early 2000s, when an average controlling shareholder share reached 40 to 50 per cent, with two-thirds of joint-stock companies having a controlling shareholder. 34 Predictably, corporate governance focused on the interests of controlling shareholders. The rise of controlling shareholders deepened their tension with the interest of minority shareholders. Those conflicts called for new legal norms and institutional standards to mitigate a chance for corporate abuse. 35 New legal requirements were not the only incentives for companies to enhance their corporate governance practices. During that stage, companies reached the maximum of their internal financial capacities. 36 At the same time, Russian capital markets continued to emerge and offered limited opportunities for companies to raise additional funding. In those circumstances, the priorities shifted towards the exploration of new financial sources. Corporate governance became a significant factor that assisted companies with access to capital markets. The adherence to best practices and international standards, including independent directors and professional boards, fair treatment of minority shareholders, and effective conflict resolution mechanisms, helped companies improve their reputation and build trust with investors and creditors. 37 The potential access to new funding strengthened the Russian corporate sector's incentives to mitigate information asymmetry and moral hazard problems. However, it is worth to mention that the effect of better corporate governance standards was higher in larger public companies than in small and medium-sized enterprises which were less concerned about access to international capital markets. loyal to the political regime. 41 Those processes were accompanied by the Federal Government's acquisitions of several large private companies. 42 The general tendency of expanding the state share in the economy became more evident and steadier after the financial crisis of 2008. The growing state share also contributed to further ownership concentration. 43 The third stage began with the crisis of 2008 that caused the collapse of the domestic securities markets and severely affected large public companies. 44 Adherence to better corporate governance was no longer enough to attract investments, and the focus shifted to higher efficiency and organisational effectiveness in terms of existing resource capacities. Although the number of companies striving to comply with the best corporate governance practices was increasing over the years, the overall quality of corporate governance remained relatively low. 45 In 2016, the Federal Government adopted a roadmap for eliminating legal loopholes and improving the corporate governance system, including minority shareholders protection. 46 Russia approved laws on the illegal use of insider information and market manipulations, amended laws on joint-stock companies and securities markets, and reinforced administrative liability for financial violations and misconduct. 47 The expansion of the Russian state sector By the end of the 1990s, the State's presence in the economy was widely spread across various sectors in the form of unitary enterprises and newly created joint-stock companies. 48 In the 2000s, the Federal Government made an effort to increase the management efficiency of its dispersed assets by consolidating them in state holding groups. 49  Integration took place in such industries as nuclear energy, railways, air and sea transport, defence, and postal services. It went in parallel with the process of restructuring natural monopolies and a growing participation of the largest state banks in the capital of companies through lending and purchase of shares. See Radygin (n 41). 50 See Radygin (n 41).The Yukos company case followed by its bankruptcy and reallocation of its assets is usually referred to as the most vivid example of the state policy that aimed to redistribute property in favour of state or pro-state economic actors. 51 See Radygin (n 41). Among them are Sibneft, AvtoVAZ, and Yuganskneftegaz, and the purchase of their assets which frequently referred to as nationalisation essentially.
A steady trend towards the state's dominance in the leading sectors of the Russian economy continued in 2007 to 2008, with the reduction in the number of unitary enterprises, the integration of state assets into holding companies, and scaling up those companies and their business interests through acquisitions. 52 In 2010, the total share of SOEs in the RTS index was about 54.5 per cent, including about 89.5 per cent in the financial sector, 66.5 per cent in the oil and gas sector, and 61 per cent in the power supply sector. 53 As a result of the financial recession of 2008 and the following anti-crisis measures, 54 the state's share in GDP grew from 41.2 per cent in 2008 to 51.8 per cent in 2009. 55 By 2012, Russia owned shares in more than 2.5 thousand joint-stock companies. 56 The consolidation of state ownership raised several concerns among experts and academics. The expansion of state and quasi-state structures was associated with typical negative effects triggered by state ownership, including low profitability, market distortions, limited competition, and non-transparency. 57 The statistics showed that out of 2.5 thousand companies owned by the State, only 60 companies were profitable in 2011, while 22 per cent of joint-stock companies demonstrated losses. 58 The sanctions of the US and the EU expedited the State's expansion. 59 Recently, Western countries have vetoed mergers and acquisitions involving Russian companies. 60 Several joint venture projects with Russian banks and investors have been terminated. 61 Even Russian companies that do not appear on the sanctions list suffer from political tension. Large European and US 52 Throughout the entire period, acquisitions by SOEs dominated their sales expanding the state's share in the major sectors. The biggest number of acquisitions by SOEs took place in the oil and gas sector. It accounted for 56% of the total value of mergers and acquisitions by SOEs. Three sectorsoil and gas, finance, and electric poweraccounted for US$110. The state sector's growth was pushed by three major trends: (1) government loans to pay out foreign obligations of Russian companies and banks and direct intervention in the stock market, and (3) opening deposits in state banks with the subsequent transfer of these funds to inject them into share capital: Radygin (n 41). 55 Abramov (n 25). 56 The Russian Federation was the sole shareholder in more than 50% of such organizations. The State held less than 2% of shares in 25% of the companies, a block share in 9% and a controlling share in 4% of those companies respectively. See Elena Litvina, 'Goscompanii i ikh mesto v sovremennoi economike Rossii [State companies and their role in the Russian economy]' (2013) 8 Vestnik universiteta [The University Bulletin] 23. 57 It is worth mentioning that, in many instances, SOEs may serve broader public needs. They might fulfil objectives other than profit, including macroeconomic sustainability, industrial development, and employment. SOEs often deliver subsidised services and capital, maintain guaranteed markets, and support domestic suppliers. These policy objectives are achieved at the expense of SOEs' profitability. In Russia's case, SOEs can be for-profit and non-profit. Therefore, the profitability argument relates to JSCs expected to generate profit. In this regard, Russia's Accounts Chamber argues that still a 'significant number' of for-profit JSCs with the state share are financially 'unstable' or operate at a loss. The state auditors came to this conclusion based on the analysis of 123 companies, out of which only 66 received a net profit at the end of 2018. Yana Milukova, 'Bolee 500 companii s gosudarstvennym uchatiyem poslediye tri goda ne delilis pribylyu s byudjetom [More than 500 companies with the state share have not contributed to the state budget for the last three years]' (Forbes Russia, 27 Aug 2020) <https:// www.forbes.ru/newsroom/finansy-i-investicii/407843-bolshe-500-kompaniy-s-gosuchastiem-poslednie-tri-goda-ne> accessed 20 Jul 2021. 58 Despite their significant economic share, the total net profit received by joint-stock company with the state share in 2011 was equal to 1,554 billion rubles, which was only 18% of the total net profit of business organisations operating in Russia. See Litvina (n 56). corporations have received a warning to supply equipment and technologies to their Russian counterparts. 62 The opportunity to attract long-term funds for projects in Russia has diminished, depriving Russian companies of access to technologies and capital from the West. 63 Sanctions against Russian companies facilitated the reliance on state funding and the creation of new SOEs. 64 In 2015, the Russian Government had to put extra funds to support domestic enterprises affected by the sanctions. 65 According to the Minister of Finance of the Russian Federation, if the economic situation worsens, the Russian Government plans to allocate more than 60 per cent of the National Welfare Fund to support the economy. 66 The Federal Antimonopoly Service of the Russian Federation revealed that the combined contribution of SOEs to Russia's GDP in 2015 was about 70 per cent, while that share did not exceed 35 per cent in 2005. 67 In 2018, that share reached 60 per cent. 68 Limited domestic data on the state share in the economy generates mixed numbers. Although those numbers can vary, the tendency towards the state share's growth is evident and calls for a comprehensive analysis. The following paragraphs discuss the organisational forms of Russian SOEs.

Organisational forms of Russia's SOEs
Initially, organisational forms of Russia's SOE were limited to socialist unitary enterprises. 69 Those traditional SOEs operated as means of production managed by the Soviet authorities directly. 70 They were part of the state planning system and had to deliver specific production targets defined by the State. 71 The revenues, if any, were transferred to the State's budget. During the Soviet period, state property was assigned to state enterprises based on the principle of operational management. It included the rights of enterprises to possess, utilise and dispose state property in accordance with the law, planning targets, and the property purpose. At the time of the Perestroika (new economic course), the Soviet authorities introduced some reforms that aimed to increase the economic autonomy of state enterprises without the change of their legal status. 'In some sense it was an attempt to create some sort of market relations without a real market. Enterprises should gain some autonomy without becoming autonomous actors. Legislators hesitated, for example, to transform state enterprises into public companies which could have remained under State control. Instead, the right of operative management was redesigned and complemented by a right of full economic jurisdiction as established by the Law "On property in the USSR" of 1990.' See Eugenia State unitary enterprises continue to exist in Russia today as a relic of the Soviet management approach. 73 Asset management and public policy functions were outside the scope of unitary enterprises designed for pure production purposes. As a response to the State's economic expansion, the legislator introduced new types of SOEs: public law companies, state corporations, and state companies. 74 All three forms share several main commonalities. First, they have a single ownerthe Russian Federation and the Federal Government acting on its behalf. Every such SOE is established by a special federal law defining its goals, governance, property rights, and disclosure obligations. Second, they are non-corporate (unitary) and non-commercial legal entities with no equity capital divided by shares and no focus on profit as their primary goal. Third, these SOEs have a number of functions: from public services and public administration to asset management and industrial development. They still can conduct entrepreneurial activities and operate on the market, but only if such activities contribute to and comply with the goals defined by the federal law. These activities are subject to several restrictions and protection measures. In particular, the state owner has the statutory right to approve major transactions and protect SOE property from any creditor claims while avoiding responsibility for the obligations of its SOEs. Bankruptcy laws and procedures do not apply to these forms of SOEs. Fourth, federal laws establish minimum standards for disclosure and transparency. Finally, these SOEs have an identical governance structure that includes a supervisory board as the supreme governing body and a general director (executive board).
The only organisational form of SOEs in Russia, which has a corporate commercial nature, is a joint-stock company (JSC) regulated by the Federal Law of 1995. 75 Its governance structure, the distribution of rights and powers, capitalisation, and decision-making processes resemble JSCs elsewhere. The State remains the most influential shareholder in terms of its share's size and impact capacities. 76 The State's influence causes typical corporate governance distortions, including the complexity of goals, the tension between the roles of a shareholder and a regulator, more profound 'principal-agent' problems, and weak management incentives. The state can hold a controlling, blocking, or minority share. Figure 1 shows the percentage of SOEs based on the state share's size. 77 The shareholder role can be fulfilled by the Federal Property Management Agency (Rosimushchestvo), Federal ministries (ie, the Ministry of Defence or Ministry of Finance), the Central Bank of Russia, state corporations or companies, or municipal authorities. In Typically, a controlling, blocking and minority share means up to 50%, from 25% to 50%, and below 25% respectively. As of 1 January 2021, the federal shareholding map looks as follows: the Federal Government holds a controlling share in 42% of JSCs and a blocking share in 8% of them. A half of JSCs has the State as a minority shareholder (less than 25% of shares including the 'golden share'). See Calendar (n 73).
strategically-important SOEs, the Government of the Russian Federation or the Chairman of the Government of the Russian Federation performs this role. 78 Due to the growing budget deficit, the Federal Government has been reducing the number of SOEs across different sectors. 79 However, their substantial reduction over the past five years does not reflect the state's shrinking stake in the national economy, but rather indicates reorganisation processes within the state sector itself, including the growing number of companies with mixed ownership. 80 When the State becomes a minority shareholder, it utilises several governance tools to protect its interest. In particular, critical shareholder decisions often require a qualified majority of votes, including minority shareholders. The Federal Government can nominate its representative officers and representative members to the board and internal audit commission respectively. The opportunity of cumulative voting increases the chances for these representatives to be elected. The minority share allows the State to call for shareholders meetings, propose an item to its agenda, and access financial and other corporate documents. Finally, the privatisation legislation includes several norms protecting the State's share from future dilution. 81 When giving up control, the Federal Government can introduce a 'golden share'. 82 Its justification is to ensure that the company continues complying with Russia's security interests and protects Russian citizens' morals, health, rights, and other legitimate interests. 83 The statistics show that the Federal Government holds 'golden shares' in approximately 9 per cent of the total number of its JSCs. 84 The State can introduce this share from the moment when its shareholding drops below the blocking threshold (25 per cent plus one share). 85 Ultimately, the State also has the authority to decide on the termination of this right. 86

Discussion
The separation of ownership and regulation From the traditional perspective, Russian SOEs appear to be an example of the classic problem of an 'absent owner'. 87 There is no single law regulating SOEs, no single set of requirements applicable to them, and no single organisation managing state ownership. State officials, being agents themselves, do not have sufficient economic incentives and autonomy to prioritise SOEs' financial performance. Only a fraction of Russia's largest SOEs has gone through corporatisation. 88 The rest of SOEs, including the new organisational forms, are not corporations. 89 The State employs its administrative power and bureaucratic apparatus to govern them directly and prioritise their policy goals and functions.
The explicit non-commercial nature of the new organisational forms tackles the problem of multiple objectives. 90 Although federal laws do not mention a single objective but rather outline the list 81 Article 40 of the Federal Law 'On the privatisation of state and municipal property' preserves the state's blocking share in the authorized capital in case of any additional issuance of shares: no less than 25% or 50% plus 1 share in strategic SOEs. See This applies to any company considered strategically important for the national interests of the Russian Federation, its national security and sustainable development. Alexander Pyatin, 'Pravitelstvo predlozhilo rasshirit primeneniye mechanisma "zolotoi aktsii" [The Government has proposed to expand the application of the "golden share" mechanism]' (Forbes, 13 Jul 2021) <https://www.forbes.ru/newsroom/finansy-i-investicii/434653-pravitelstvo-predlozhilo-rasshirit-primenenie-mehanizma-zolotoy> accessed 28 Jul 2021. Here and in the rest of this article, the reference to the new forms of SOEs mostly means 8 state corporations as the most numerous and influential group among the three forms. There is only one or two state companies and public law companies in Russia. 90 In this case, the conflict between commercial and policy considerations. See OECD (n 2). of objectives, they all fall into the state policy agenda, leaving no room for confusion that revenue is not the primary goal. Profit-seeking is allowed, but only if it does not conflict or disrupt strategic policy goals and other development mandates from the State. 91 To align SOEs toward their strategic agenda, the State has designed a governance structure that controls the nomination, selection, appointment, and rotation of SOE directors and executives and reserves the decision-making power on material issues. The governance structure creates no conflict between the black letter law and the State's actual governance approach. 92 From the perspective of other market actors, it creates no illusion that SOEs act to pursue commercial and market objectives. This approach distinguishes Russia's SOEs from large SOEs in other countries, particularly China, where corporatisation and the formal separation of the commercial and regulatory functions, ownership and control, have been the continuous focus of SOE reforms. 93 Blurred distinction among SOE organisational forms The reference to the term 'company' or 'corporation' in the organisational forms of a public law company, state corporation, or state company might inaccurately indicate that these legal entities are corporate entities. In other words, it may wrongfully signal that they have gone through a corporatisation process that establishes corporate structures and governance practices typical to a corporate form. A standard corporate entity demonstrates the following key features: first, it has a separate legal personality; second, its shareholders have limited liability; third, its equity capital is divided by transferable shares (stakes); and fourth, its governance structure reflects the idea of delegated management. 94 The fundamental goal behind corporatisation is to create an arms-length relationship between a corporate entity, existing independently, and its shareholders. 95 However, neither of the new forms of SOEs demonstrate the full scope of corporate attributes; Russia's civil law does not define them as corporations. Therefore, the reference to a 'company' or 'corporation' in this case is misleading and causes challenges for adequate comparative studies. 96 The law provides the State with an opportunity to safeguard the SOEs' most important assets from creditors exempting these assets from Russia's bankruptcy law. Although the SOEs' assets are separated from the assets of their founderthe State (as opposed to unitary enterprises, in which the state keeps the property title), the law grants the Federal Government the right to exempt a pool of assets and/or type of assets from creditor claims. Additionally, the Federal Government has the authority to identify the scope of transactions that requires its approval or instruct the board to transfer assets back to the ownership of the Russian Federation if such assets are free from 91 See the Federal Law 1996 (n 74). 92 China, in contrast, 'has promulgated-and enforced to a large degree-so many national laws, regulations and rules to institutionalize corporate governance, many of which set legal procedures and restrictions to limit external interference of enterprise management and governance.' But at the same time, it is evident that the state 'directly controls not only the personnel but also sometimes the operation of SOEs, bypassing the legal governance structure consisting of the board of directors and management' which the state has introduced. See Wang (n 4). obligations. 97 The transfer can potentially occur after the SOE has entered a deal and might significantly affect the SOE's financial sustainability.
The State enjoys a wide range of opportunities to challenge the SOEs' transactions if they do not comply with the State's fiscal and policy interests. 98 The State does not limit SOEs' right to conduct commercial activities if those activities comply with the SOE's goals. Notwithstanding the status of non-profit organisations, public law companies, state corporations, and state companies can do business in their respective industries. 99 They can raise capital on the market, including the issuance of corporate bonds. 100 However, despite an enormous decision-making authority and interventionalist power, the law releases the State from being financially responsible for its SOEs reinforcing the principles of asset partitioning and limited liability at the expense of creditors. 101 The legal prioritisation of the State's interests over creditors' interests creates unequal conditions for state and private market actors. It disrupts constructive market signals, equal access to information, effective capital allocation, and other principles of a free market economy. Therefore, legal norms institutionalising this prioritisation are not compatible with fundamental market standards as well as Russia's constitutional principle of the equal protection of property rights. 102 Substantively, it is challenging to distinguish among the three forms since they share similar status, objectives, functions, and governance structures. Even if the Federal Government is assumed to perform the role of a single shareholder, it is inherently wrong. In any corporate structure, a single shareholder may decide to split control or raise additional equity investments through private or public offerings of shares. As a result, new shareholders acquire the same rights to participate in the management and receive dividends on the one hand, and bear the same risk of losses equal to their stake on the other. However, this scenario is impossible for public law companies, state corporations, and state companies. The only way these SOEs can raise equity capital is to appeal to their founder.
From the dual role perspective, the new forms of SOEs can not only do business in their industries but also regulate them. 103 This peculiarity creates the potential for market and regulatory distortions as well as the abuse of powers by those SOEs while initiating investment projects, launching new regulations, granting licenses, or providing access to financial resources. The lack of legislative and conceptual distinctions among SOE forms ultimately leads to difficulties with evaluating their performance and finding efficient governance solutions. Although the governance system of the new forms of SOEs may bear some resemblance to traditional corporate governance, it is not corporate governance per se. The state development corporation VEB.RF is an issuer of corporate bonds placed domestically. The corporation also arranged several Eurobond emissions in the past. Please see the official website for more details: 'Investor Relations' (VEB.RF) <https://xn--90ab5f.xn--p1ai/en/investors/#debt-instruments> accessed 3 Oct 2020. 101 The doctrines of limited liability and asset partitioning represent the essence of the modern concept of a corporate entity. However, their application in the three organisational forms of Russian SOEs (ie, state corporations, state companies, and public law companies) can be selective depending on the State's need to protect its interest. In addition, the three organisational forms benefit from soft budget constraints frequently associated with the SOE management.

SOE performance management
One of the challenges typically associated with SOE performance is the presence of both commercial and non-commercial objectives. 104 The non-commercial goals have financial costs but do not generate revenue, making it difficult for an SOE to meet its financial targets. Mixed objectives cause information asymmetries that can impede effective monitoring and allow managers to justify poor performance. 105 A sound performance management system addresses these asymmetries and incentive tensions by distinguishing financial and non-financial objectives and clearly articulating non-financial objectives. 106 In 2015, President Vladimir Putin emphasised the need to review the existing management system for SOEs in his Annual Address to the Federal Assembly. 107 The President instructed the Federal Government to introduce new metrics of key performance indicators to reinforce a direct link between the remuneration of senior management and the achieved financial results. 108 Followed by the President's message, the Federal Government attempted to systematise and enhance its approach to SOE performance. Rosimushchestvo has approved a series of mandatory guidelines for increasing investment and operational efficiency, optimising cost reduction, and developing key performance indicators (KPIs) by SOEs. 109 In particular, the guidelines on KPIs segment SOEs depended on their organisational form (JSC, LLC, unitary enterprise, or state corporation), financial performance, and sector. The guidelines empower every SOE to determine an optimal combination of prescribed financial and industry-specific (non-financial) indicators. 110  ibid. Among the key indicators to measure progress are the percentage of an annual decrease in the number of jointstock companies with the state share (from 5% to 20% each year), the percentage of an annual decrease in the number of federal state unitary enterprises (from 9% to 22% each year), and the share of civil servants in the management and supervisory boards (no more than 50%). The program aims to optimise the companies in line with the tasks and strategic interests of the Russian Federation, ensure their competitiveness, improve corporate governance, and create a single system of accounting and management for the federal property.
SOEs remain the key instrument of the strategic development and planning system designed by the Federal Law of 2014: 'On Strategic Planning in the Russian Federation'. 113 This Federal Law requires SOEs to subordinate their plans and investments to the state strategies, including the national security strategy, the socio-economic development strategy, the spatial development strategy, and regional strategies. The Ministry of Economic Development and Rosimushchestvo are responsible for aligning SOEs' strategies and performance. 114 Since the early 2000s, these two state agencies have offered several packages of recommendations and guidelines. 115 However, the lack of consistency and coherence among strategic goals at the federal level and potentially different expectations and agendas supported by government agencies cause a serious coordination problem. 116 The non-profit focus of the new forms of SOEs created another challenge: the tension between SOEs' objectives and their portfolio companies' interests, which affects the design and delivery of performance indicators. While the new forms have broader development policy targets, their portfolio includes commercial corporations that derive most of their revenues from the market. The presence of conflicting objectives in the group leads to different performance expectations, which in turn creates challenges for adequate performance management. The result is a very complex management system with multiple indicators that can deteriorate performance and innovation. Recent studies show that Russian companies have achieved little progress in offering innovative products to the domestic and international markets. 117 The share of Russian enterprises on the global market for high-tech products was only 0.3 per cent. 118 The most powerful extractive sector does not demonstrate high performance management efficiency. The largest public SOEs Gazprom and Rosneft occupy leading positions on the Russian and international energy markets. 119 However, studies of the two companies from 2013 to 2015 found no direct or strong correlation between management remuneration and the companies' financial and production performance. 120 When a high level of remuneration is guaranteed regardless of the company's financial results, there is no real incentive for the top management to improve economic outcomes. Although both companies adopted key performance indicators for senior management, the studies found no real effect. 121 Another study of SOEs in Russia demonstrates that although 91 per cent of SOEs link top management remuneration to the company's financial results, this correlation is mostly relevant to short-term results (77 per cent). One explanation of the weak correlation between remuneration and performance is the practice of state formal directives discussed in the following section. 123 This practice mitigates the board's ability to exercise business judgement and substantially limits its incentives to improve SOEs' financial performance. The study conducted by the Russian Institute of Directors indicated that state directives often appear to be generic and do not consider the specific characteristics of each SOE. Also, there might be a lack of consistency among directives issued by different state agencies. 124 All these factors undermine SOE's financial performance and raise the question of the role of the SOE board in decision-making.

SOE supervisory board 125
Professional boards of directors are the major elements of a sound corporate governance structure. 126 Board members usually acquire extensive commercial, financial, and strategic knowledge and skills to exercise their business judgment effectively. The design of robust and transparent practices for well-functioning boards ensures that board members possess the necessary competencies and independence to fulfil their duties. 127 In this regard, governments intentionally limit their interference in corporate matters to increase autonomy and secure the unbiased business judgment of SOE boards, creating a system of checks and balances that deals with agency conflicts. It is also assumed that the interests of an SOE and its state shareholder are inherently different, especially in corporate commercial SOEs. 128 In Russia's non-corporate non-commercial SOEs, their governance bodies implement one fundamental purpose: the strategy of an ultimate owner and decision-makerthe State. There is no traditional conflict of objectives since the only interest that matters is the State's interest. In this scenario, the role of the board becomes much less strategic and more instrumental.
The general criticism of the weak board typically emphasises the State's potential to intervene in its activities. 129 An empowered board can offset the State's opportunistic behaviour and limit its interference. 130 However, in Russia's non-corporate non-commercial SOEs, the board adopts and implements the strategy that has been pre-defined by the State and endorses executives selected by the State. 131 Government policies and decisions frame the board's powers. The board's role transforms into a watchdog, which administers the State's assets, supervises the strategy's implementation, and supports the general director. This role drives the incentives, determines the qualification requirements of the board members, and shapes performance expectations.
The existing practice of voting based on formal directives issued by the state reinforces this trend. Formal directives are the central element of the state management system. They are administrative acts addressed to state representative officers and expressing the state shareholder's will at the general meeting of shareholders or board meetings. The procedure for issuing formal directives is subject to administrative laws. 123 ibid. The assessment of impact on the financial and economic activities of SOEs is not quite clear. The study argues that 33.3% of respondents (SOE directors and top managers) mention the directives mitigate decision-making and financial efficiency, while 32% claims that directives contribute to the development of SOEs. The remaining 34.7% of respondents reply that the nature of impact depends on a particular situation. The extent to which the directives influence SOE governance and decision-making depends on two factors: the size of the state share and the status of an SOE (publicly traded or nonpublic, strategic or non-strategic). In particular, the Federal Government selects and appoints the entire board in state corporations and JSCs solely owned by the State. In JSCs, in which the State shareholder (typically Rosimushchestvo) holds more than 25 per cent, it can select and nominate its representative officers to the board. 132 These representative officers can be government officials, civil servants, or professional directors. In the latter case, they receive remuneration and act based on an agreement. 133 This agreement describes the representative officer's rights, duties, and liability. The scope of the duties includes: first, timely informing their principal on issues requiring state directives; second, voting strictly per directives; third, calling for a board meeting when it is necessary, and lastly, participating in board meetings and proposing items to their agenda. 134 These duties largely focus on compliance rather than an independent business judgement. Representative officers essentially are not corporate directors. Instead, they play the role of state administrators obliged to follow formal directives defining their decisions and responsibilities. 135 The non-fulfilment of the duties leads to the unilateral replacement of a representative officer by the authorised state agency. 136 Also, representative officers can be held personally liable for their failure to comply with their duties. 137 It is worth mentioning that personal liability applies to all directors and officers of the companies in which the State holds a controlling share and their subsidiaries. It also applies to the officers of companies in which the State has a 'golden share'.
Ironically, the Russian Institute of Directors' survey demonstrated that the majority of SOE directors are in favour of maintaining formal directives. In particular, 79.1 per cent of SOE directors assessed this practice as acceptable, and 74.8 per cent of respondents even believed that the abolition of this practice would cause management risks. 138 Among the main positive aspects of formal directives, SOE directors highlighted the possibility of safeguarding federal property, fulfilling the state 132 A special state commission carries out the selection process of representative officers. Among the key criteria: experience in strategic planning, audit, HR, corporate governance, innovation, finance or investments, no disciplinary sanctions, board member experience, and leadership positions' experience. See 'V Rosimushchestve prokhodyat zasedaniya Komissii po otboru kandidatov v organy upravleniya i revizionniye komissii JSC Spetsperechnya na 2020 corporativy god [Rosimushchestvo is holding the meeting of the Commission on the selection of candidates in management boards and audit commissions of JSCs from the special list for 2020]' (Federal Agency of State Property Management, 7 Nov 2019) <https://www.rosim.ru/press/news/362551> accessed 23 Jul 2021. The same provisions apply to representative officers in companies in which the State has a 'golden share': The Federal Government Decree (n 83). 137 In March 2021, Russia amended its Criminal Code to extend criminal liability to not only corporate officers and representative officers of companies with the state controlling share, but also officers of their subsidiaries and companies with the state's 'golden share'. These categories of officers become equal to government officials which means that they can be held liable for such criminal offences as the abuse of official powers, misappropriation of budget funds, receiving and giving a bribe, forgery, and negligence. Dmitri Goncharuk, 'Glavy "dochek" otvetyat za corruptsiyu kak dolzhnostnyie litsa [Top management of "subsidiaries" will be liable for corruption as state officials]' (Parlamentskaya gazeta [Parliamentary Gazette], 7 Mar 2021) <https://www.pnp.ru/social/glavy-dochek-goskompaniy-otvetyat-za-korrupciyu-kak-dolzhnostnye-lica.html> accessed 23 Jul 2021. 138 Only 9.3% of respondents defined the practice as negative, while 51.9% of respondents claimed that they were not ready for the complete removal of the practice in the near future, and 21.7% of respondents were not ready for the complete removal of directives at any time. Only 26.4% of respondents expressed their readiness for the change. See RID (n 122).
shareholder's will, and protecting directors from liability in the absence of liability insurance and profound regulation. 139 The extent to which the existing practice of formal directives influences SOEs' financial and economic activities is not clear. 140 However, it is quite apparent that formal directives can potentially deprive SOE directors of the opportunity to play a traditional and meaningful role in governance. 141 Despite several reforms related to corporate boards in Russia, 142 those changes have been fragmentary and unsystematic, mitigating the overall positive effect. 143 For instance, while the number of SOEs with independent directors grows, 144 the share of SOEs in which independent directors comprise more than one-fourth of the board still did not exceed 49 per cent. 145 Rationale, Characteristics, and Relevance Previous sections expose several classic flaws of Russia's state ownership system: no separation of ownership and regulatory functions, inadequate performance management, and non-professional boards. All these factors are considered to raise the agency costs of Russian SOEs and undermine their financial performance. Then, the legitimate questions are: first, what is the rationale behind the system that appears to be costly, and second, how Russia's SOEs can operate on the market and be among the world's largest companies?
All recent legislative amendments illustrate the Federal Government's attempt to find efficient organisational forms to manage state assets. 146 Since state ownership occupies the central place in Russia's economy, creating an effective management system for SOEs becomes critical. At the same time, Russia's system of SOEs is decentralised. The key federal property owner is the Federal Government or the Federal Agency for State Property Management (Rosimushchestvo) which reports to the Government of the Russian Federation. The second category is represented by state corporations (for example, Rostec, Rosatom, or VEB.RF) which are the major owners of assets transferred to them by the State. The third main category includes the Central Bank of Russia, Federal ministries (particularly the Ministry of Defence and the Ministry of Finance), and municipal authorities. Figure 2 offers an illustration of the existing ownership system.
When the shares of SOEs remain federal property, the State's governance approach depends on the non-strategic or strategic (special) status of an individual SOE. In the latter case, the model becomes more complex. It requires the engagement of the Presidential Administration, Federal ministries, and Rosimushchestvo to reach an agreement on crucial shareholder decisions finalised by the 139 ibid. 140 ibid. The Russian Institute of Directors interviewed 319 board members. The study revealed contradicting results: from a complete rejection of the directive practice to the desire to maintain it. 141 ibid. Only 25% of SOE directors claimed that the directives do not affect their professional judgment. 142 ibid. By 2013, 92% of SOE boards included at least one independent director, 91% adopted an internal document that correlates top management remuneration with the company's activities, 80% of SOE boards created audit committees, and 79% of companies approved a board meeting plan. 143 ibid. For example, the RID study demonstrated that, although there was an increase in the number of SOEs with at least one independent director on the board, the percentage of SOE boards where an HR and remuneration committee and an audit committee included only independent or non-executive and independent directors remained low (51% and 57% respectively). Another example was the practice of creating board committees. Over 80% of SOEs had audit committees and human resources and remuneration committees. However, only a half of those committees held regular meetings. The level of information disclosure of the results of board meetings remained extremely low. Only 17% of SOEs allocated board decisions on their websites in 2013. 144 Article 81 of the Federal Law 'On Joint-Stock Companies' defines independence solely in the context of interested party transactions in which a board member takes part. The Rules for Admitting Securities to Trading on Russian Stock Exchanges and the Russian Corporate Conduct Code defines additional independence criteria. Those criteria apply to companies listed on the stock exchange and adopted the Code. 145 The Code of Corporate Conduct states that independent directors should comprise at least one quarter of the board. 146 Sukhanov (n 96).
Federal Government. In SOEs with no special or strategic status, Rosimushchestvo has the right to exercise shareholder powers independently. 147 Another factor determining the State's governance approach is the percentage of shares owned by the Russian Federation. When all shares belong to federal property, the Federal Government or Rosimushchestvo (depending on the strategic status of an SOE) replaces the general meeting of shareholders. Their decisions become the decisions of the single shareholder. The State typically holds a hundred percent of shares in the military industry and the most critical elements of infrastructurerailways, energy facilities, and post office, etc.
When the Russian Federation has a controlling, minority, or 'golden share', the Federal Government or Rosimushchestvo appoints its representative officers participating in general meetings of shareholders and board meetings, voting per formal directives, and reporting to the Federal Government or Rosimushchestvo. To improve communication with representative officers, Rosimushchestvo has introduced a special channel -MV Portal. The portal's single informational space allows all authorised participants to access the state asset management data in real time. The portal offers the opportunity to interact and exchange information, monitor the implementation of directives, and report on specific instructions from the President of the Russian Federation and the Federal Government. 148 State corporations are the second category of SOE shareholders. The expansion of the State's presence in the national economy and the call for the more effective governance of state assets resulted in the emergence of state corporations designed to manage and control a large pool of different organisations. The new forms of SOEs appear as a combination of corporate governance, market, and administrative instruments. For instance, Rosatom and Rostec are state corporations that manage a broad portfolio of companies through participation in authorised capital. The portfolio of Rosatom and Rostec resembles a classic holding company structure that governs subsidiaries and affiliated organisations based on direct, indirect, or cross-shareholding. Both groups serve state interests in strategically important sectors. They are platforms for the implementation of the State's The Federal Government Decree (n 83). 148 Rosimushchestvo Report (n 109). development programs and investments. 149 They accumulate significant financial and production resources which they then distribute across different industries based on the existing market and the country's socio-economic needs.
The main feature of Russia's state group model is its heterogeneous nature in terms of industries, business activities, legal entities, their status (strategic or non-strategic), and goals (commercial and non-commercial). The core idea of the model is better governance by introducing market forces, inviting professional management expertise, and mitigating the bureaucracy of administrative processes. 150 The model exposes the groups to domestic and, more importantly, international market competition to boost incentives to innovate. It integrates SOEs into different industries and production chains to assist the Federal Government with regulation and monitoring when legal norms fail to function effectively.
As mentioned in the previous section, state corporations and other large SOEs do business in their industries and, de jure or de facto, regulate them. For instance, Rosatom is legislatively empowered to implement a public administration function related to the usage, licensing, development, production, and disposal of nuclear weapons and nuclear power. The state corporation issues legal acts regulating the industry's control, standardisation, and certification. At the same time, Rosatom's group includes more than 140 companies (out of which, approximately 100 are commercial JSCs and LLCs), including several commercial companies established overseas under foreign law. The group is among the world's leading producers of nuclear energy and uranium. 151 The overseas companies explore new business opportunities and manage Rosatom's portfolio worldwide, including Central Asia, Africa, and the US. 152 Another example is Rosteca state corporation established by the Presidential decree in 2008 'to support Russia's industrial complex through hard times and make domestic industries competitive on the international market.' 153 Back then, the Federal Government transferred 426 legal entities to Rostec's group. About half of those entities were insolvent, experiencing financial losses, or undergoing bankruptcy. 154 Many of them represented Russia's military industry. Over ten years, the group could grow its production and revenue, launch non-military projects and new businesses, expand its international contracts portfolio and export. The total revenue of Rostec grew from RUB 511 billion in 2009 to RUB 1,771 billion in 2019. 155 Today, Rostec's group includes 25 large holding companies. 156 These holding companies operate in various business sectors: from investment banking and business development to car manufacturing, from pharmaceuticals to information security. They are JSCs with a clear commercial agenda that export their products and services to 70 countries. 157 149 For instance, VEB.RF is a state corporation and national economic development institution. 'In partnership with commercial banks, VEB.RF provides financing for large-scale projects to develop the country's infrastructure, industrial production and social sphere, strengthen its technological potential and improve quality of life.' See 'Our Development Strategy -Russia's Development Strategy' (VEB.RF) <https://xn--90ab5f.xn--p1ai/en/about-us/> accessed 21 Jul 2021. 150 As noted by the President of the Russian Federation Vladimir Putin, the goals of creating state corporations are to stop the collapse of industries and to preserve the national economy's potential through the consolidation of resources and centralization of management. GE Mamtsev, 'Finansovo-pravovyie aspekty razvitiya istituta gosedarstvennykh corporatsi v Rossii i zarubezhnykh gosudarstvakh [Financial-legal aspects  ibid. According to Rostec's website, the total revenue of all of the group grew from RUB 511 billion in 2009 to nearly RUB 1.5 trillion in 2017. In the same year, Rostec's products were exported to 70 countries. The military export's share was The Federal Government and the Presidential Administration control both groups through their parent companies: Rostec and Rosatom. The parent company manages its group independently through a single or controlling shareholding and board representation. Every company in the group (except for several unitary enterprises) is a separate legal entity with fundamental corporate attributes, including limited liability and asset partitioning. Group companies are established and regulated by corporate law norms and corporate governance practices, not administrative rules and processes.
Therefore, the existing model of Russia's SOEs represents a compromise: exercising close control over strategic SOEs while taking advantage of market infrastructure and some contemporary corporate governance practices. Initial organisational forms inherited from the Soviet legacy did not provide the State with enough flexibility and freedom to raise capital, restructure assets, and take business risks domestically and internationally. 158 In contrast, traditional corporate forms could hardly control negative externalities and created barriers to direct oversight that the political leadership intended to preserve. 159 However, it is doubtful that the existing model is efficient. The efficiency argument relates to the model's design and implementation. A recent report issued by the Accounts Chamber of the Russian Federation emphasises that the model suffers from several major shortcomings. 160 First, there is no reliable source of data on the number of SOEs in Russia. Rosimushestvo, Rosstat, and the Federal Tax Service offer contradictory statistics. The absence of adequate and reliable data hinders the analysis of SOEs' governance, performance, and real impact on the national economy. The Federal Government focuses on a narrow circle of the largest and most strategic SOEs securing a substantial budget revenues inflow. 161 Since 2017, the 20 largest JSCs have contributed 97 per cent of the total dividends received by the federal budget, while other SOEs have been hardly monitored. 162 Second, decentralised governance and a heterogeneous pool of SOEs add to the problem of poor data. Different state bodies and organisations supervise Russia's SOEs. These SOEs vary depending on the state share's size, strategic or non-strategic role, commercial or non-commercial focus, market capitalisation, monopolistic status, and revenue flows. Multiple governance actors represent diverse interest groups and advocate for different results. The multiplicity of actors brings about no consistent approach to SOE governance.
Third, despite the opportunity to select professional directors and experts, civil servants and state officials are still the largest groups of state representative officers (almost 50 per cent of their total number). 163 The remuneration of SOE managers does not depend on their companies' financial results creating incentive disparities. 164 These disparities reveal the lack of an efficient and consistent performance management system that shapes adequate incentives for equivalent SOEs. Typical negative externalities are related to employment, social security, and the environment in the extractive sector and energy production. 160 It worth mentioning, however, that the criticism mainly targets SOEs (JSCs and unitary enterprises) belonging to the federal property (owned by Rosimushchestvo or Federal ministry). 161 In its reports to the Federal Government, the Ministry of Economic Development focuses on 10 largest SOEs only. 162 At the beginning of 2020, the register of federal property included the shares of 979 JSCs, of which information on the performance of 606 JSCs is absent. There is a lack of information on unitary enterprises as well. See Milukova (n 57). 163 RID (n 122). 164 State auditors offers an example when the management's remuneration in an unprofitable SOE is twice higher than such remuneration paid by a similar SOE generating profit. 'Chetnaya palata raskritikovala vlasti za neznaniye chisla goskompanii [The State Accounts Chamber criticised the authorities for not knowing the exact number of state companies]' (RBC, 27 Aug 2020) <https://www.rbc.ru/economics/27/08/2020/5f46759e9a79477784569e00> accessed 12 Jul 2021.
Finally, all SOEs benefit from access to state financial resources. Depending on the industry, the demand for state budget funds may vary from an SOE to an SOE. For instance, SOEs operating in the military sector rely significantly on the State as the primary investor and consumer, while publicly-listed SOEs operating in revenue-generating sectors such as oil and gas tend to depend less on state budget funds. Nonetheless, even the most profitable SOEs take advantage of soft budget constraints and existing federal programs to compensate for their costs. 165 The next question is the extent to which Russia's state ownership system is similar to or different from other models. The literature draws on several well-studied examples of state-driven economic systems, including Brazil, India, and China. 166 However, Russia's leadership might favour China's experience the most for the following reasons. In recent years, China-Russia relations have attained an 'unprecedentedly high level'. 167 The leadership of the two States praises the comprehensive and strategic partnership and display of closeness of their cooperation. 168 In 2015, Russia and China signed a joint statement on cooperation between the Belt and Road Initiative and the Eurasian Economic Union (EAEU). 169 The two countries embrace the Shanghai Cooperation Organisation (SCO), of which both States are active members. The ties between Moscow and Beijing have entered new frontiers amid their deteriorating relations with the West. Western sanctions accelerated and expanded Sino-Russian cooperation boosting new technology, manufacturing, and military projects. 170 Beijing and Moscow refer to each other as 'priority partners' that seek to strengthen political, security, military, economic, and energy cooperation. 171 For Russia, its pivot to the East is a natural response to the pressure from the West. Moscow is Beijing's largest arms supplier, while China is Russia's top trading partner. 172 In 2020, bilateral trade reached US$107 billion, representing a dramatic increase from US$58 billion in 2010. 173 Russia is China's second-highest provider of oil, after Saudi Arabia. 174 Russia actively attracts Chinese investments in its financial market, energy sector, and infrastructure, while China is interested in building its presence in Eurasia to create economic and transport links between Asia and Europe. These mutual economic interests supported by like-minded political regimes and foreign policy alignment make Chinese SOEs the most appropriate example for comparative analysis.
The comparative analysis of Russia's and China's state ownership systems exposes several main similarities and differences, particularly relevant to this study. Large SOEs play a central role in the strategic sectors of both countries. They dominate their industries domestically and are increasingly active globally. 175 The analysis of state ownership in China emphasises its main flaw: the lack of autonomy and profit incentives. 176 Similar to Russia, corporate boards in China's SOEs are primarily selected through political and administrative processes rather than endogenously chosen in the competitive managerial market. 177 Like China, Russia employs 'a networked hierarchy' of a group structure to manage its SOEs. 178 Unlike China, though, Russia's system is decentralised, with several 'core' organisations controlling groups of SOEs. Although these groups can be vertically integrated, not every group is concentrated around a particular production chain or sector. Instead, they might be highly diversified across a wide range of industries. They combine hierarchical shareholding with cross-ownership. Therefore, Russia's system appears to be even more complex, representing a hybrid between China's hierarchical architecture and the Japanese keiretsu or the Korean chaebol. 179 Another difference relates to the parent company at the top of each group. In China, these companies typically are former ministries transformed into corporate entities. In Russia, state corporations are not corporate entities, but non-commercial organisations with all the peculiarities discussed previously. State corporations report directly to the Federal Government and the Presidential Administration. They do not serve as an intermediary between the state agency and the group. Instead, they fulfil the state shareholder's role, act as asset management companies, and produce policies and regulations. Although multiple actors can complicate or obstruct the coordination process, Russia's leadership prefers a multipolar system that identifies no single powerful agency managing huge state assets and potentially questioning the leadership's agenda.
In contrast to the Russian approach, China has demonstrated a firm commitment to the strongly recommended corporatisation. 180 Driven by much greater global market and trade exposure than Russia, the Chinese leadership has been pragmatic in its desire to improve management and performance by corporatising its SOEs and adopting market principles. 181 Many SOEs in China have been converted from political entities to market-oriented corporations that operate internationally and compete globally. Chinese large SOEs are widely represented in the Fortune Global 500. 182 China's Company Law applies to all enterprises, including corporate SOEs.  Kahan & Rock (n 87). 179 For the discussion about China's hierarchical group models and its differences from the ones in Japan and South Korea, see Lin & Milhaupt (n 175). 180 Hua et al (n 4). 181 Clarke describes this approach as the following: '[T]he state wants to maintain full or controlling ownership in enterprises in several major sectors, and it wants these enterprises to be run along commercial lines in the service of wealth maximization.' See Donald Clarke, 'Corporatization, not privatization' (2003) 7 China Economic Quarterly 27. 182 To see the list of Global Fortune 500 please follow the link: Fortune, 'Fortune Global 500' <https://fortune.com/glo-bal500/> accessed 11 Nov 2021. Finally, the Chinese Communist Party exercises significant influence over corporate governance and decisions in strategic SOEs. 183 China's system has two parallel structures: a traditional corporate shareholding structure and a party-based political structure. 184 This duality is embedded in the corporate governance of China's SOEs making it unique and context-specific. 185 In Russia's case, there is no political party element in SOE governance. The ruling party United Russia neither possesses the same extent of influence on the management of Russia's SOEs nor serves as an institutional bridge that connects the system's elements as in China's case. 186

Conclusion
This article examined the role of law and corporate governance in enabling the growing influence of the state in Russia. The analysis sheds light on the organisational framework of SOEs, their objectives, and governance mechanisms. Despite increasing scholarly attention to legal institutions and governance practices of state capitalism, existing studies have focused primarily on Asian economies, while Russian SOEs remain lost. In Russia, the Federal Government has chosen to set up a group of new SOEs and deal with unexpected contingencies through their internal governance structures rather than establishing a contract-based regulatory regime to address such concerns.
The newly established SOEs are non-corporations from the perspective of both Russia's civil law and the scholarly understanding of a corporate entity. Russia's SOEs add another perspective to the understanding of state ownership systems and corporate governance narratives. In this context, the current recommendations and standards offered to SOEs may provide limited insight into Russia's state ownership system. Recent economic challenges and political agenda have shaped the Federal Government's response that provides the State with full discretion and control over its SOEs. The law expressly channels policy mandates from the Federal Government, eliminating any ambiguity about SOE objectives and awarding the state owner with substantial power over SOEs' governance. This approach has its own costs, including unequal treatment of legal entities and the lack of solid and comprehensive regulation.
While Russian markets continue to be affected by limited access to capital, imposed sanctions, and countersanctions, the Russian economy proceeds with the reliance on the state sector, which will be driven by the Federal Government strategies and Russia's national interests. These strategies bring about legislative changes and state ownership policies that can drive the system even further away from contemporary governance standards. The State's controlling position continues to be a significant factor in determining accountability structures and investment policies in Russia. Many SOEs operate not as independent corporate entities but as an instrument of the state policy that manages a large market-oriented portfolio. Without acknowledging this context and the actual dynamics of Russia's state ownership system, the dominant academic view on SOE governance sheds little light on SOEs in Russia. It can even be misleading in terms of Russia's political, legal, and economic landscape. Unless this context is understood, attempting to draw a simple