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For what it's worth, there’s been something of a kerfuffle over Medvedev’s statement in Davos that Gazprom’s (OTCPK:OGZPY) export monopoly may end. And what it's worth? Not much: remember, it’s Medvedev. In Davos.

Let’s go back to basics. The creation of a state-owned export monopoly (or any monopoly, for that matter) is fundamentally the result of the lack of a state’s fiscal capacity and ability to raise revenue through the tax system. If a state could collect taxes costlessly, the best way to exploit a resource like natural gas would be to encourage ruthless competition in exports: the competition would minimize costs and maximize the surplus to be created. A state that can collect taxes costlessly could then maximize its take by charging a tax on exports.

However, an inefficient or corrupt tax service means that the state would never realize much of this revenue. Firms would conceal sales or income, or bribe the tax authorities, and most of the tax revenue would just vanish, to Cyprus, etc.

An export monopoly can achieve the same revenue outcome. If it’s easier and cheaper for the state to audit and monitor the state export monopoly than a bevy of exporting firms that are supposed to pay tax, the state will prefer such a monopoly even if it is less efficient. There is less leakage. Not no leakage, but less leakage.

Moreover, powerful people in the state can often control and tap into the rent stream of the state firm more easily than a bunch of competing firms, some of which might just be fly-by-night shells of trading firms.

State grants of monopoly privileges are common in polities with relatively undeveloped fiscal and tax systems.

There is a political economy angle too. Look at oil export taxes in Russia. Oil companies exert political pressure on the state to reduce export taxes because a ruble not collected by the government goes into the pockets of the owners of the oil companies. State ownership reduces the power of incentives to lobby for tax reductions.

What this all means is that the elimination, or not, of Gazprom’s export monopoly will be driven by fiscal, taxation, and corruption considerations. If Putin and the siloviki (Medvedev?-please) deem that the Russian state has developed sufficient fiscal capacity and capacity to tax, they will substitute a combination of free export and taxation (similar to what is observed in the oil business) for Gazprom’s export monopoly. Relatedly, if they deem that they can siphon off the tax revenue more effectively than Gazprom’s cash flows, they will treat Gazprom like they are beginning to treat Assad: “Do I know you?”

This is the natural state in action. The natural state imposes restrictions in order to create a stream of rents that can be distributed to the elite, or to buy political support for the elite. There are different kinds of restrictions. Taxes - including export taxes. Monopoly licenses - including export monopolies. In a world with no transaction costs, there are a variety of alternative means of generating the maximum stream of rents: setting price or output are perfect substitutes.

Things are different in a world with positive transactions costs, in particular, when monitoring and measuring output/revenue/profit and/or collecting taxes are costly. With transactions costs, measurement, monitoring, and collection technologies are crucial in determining the best way of creating a stream of rents. ”Best” from the perspective of the elite, and where the stream of rents reflects the cost of monitoring, measuring, enforcement and collection.

These considerations will drive Gazprom’s fate.

Medvedev did say one sensible (though obvious) thing. “But we mustn’t lose money, that’s the important thing. Money comes first.”

The crucial thing is who is this “we,” kimosabe? It is the elite, notably Putin and the siloviki. The technology of transforming natural resource rents into income/wealth for the elite. Sometimes a grant of monopoly privilege is the most efficient way of making that transformation. That is often true in relatively crude polities with underdeveloped or corrupt taxing capacity. That has been a fair characterization of Russia for a very long time. That is what drove collectivization under Stalin. That was the rationale for the commune system in Tsarist times. That has been the case with Gazprom since the fall of the USSR. Gazprom will continue to exist as long as the taxation capacity of the Russian state is relatively weak, and it is easier to direct Gazprom’s cash flows to elite pockets than it is to direct state tax revenues to that destination.

So don’t expect Gazprom’s monopoly privilege to disappear any time soon. It is an inefficient monstrosity in some ways: it wastes land, labor, and capital in prodigious amounts. But it is the most efficient way to achieve the rent seeking objectives of the Russian elite. It is their money that comes first. They are willing to live with a wretchedly wasteful monopoly that dramatically shrinks the size of the pie, if it allows them to get a bigger piece.

Source: Medvedev Speaks the Truth About Gazprom: Money Comes First