Privatization in Russia

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Russian privatization describes the series of reforms that resulted in the large-scale privatization of state-owned assets immediately after the collapse of the Soviet Union, most importantly in the industrial, energy, and financial sectors. Most privatization took place in Russia in the early and mid-1990s, during the presidency of Boris Yeltsin, who assumed the presidency immediately after the dissolution of the Soviet Union. Although Mikhail Gorbachev relaxed restrictions on private ownership in the mid to late 1980s, private ownership of enterprises and property had essentially been illegal throughout the Soviet era. Privatization enabled Russia to shift from the deteriorating Soviet planned economy towards a market economy, but, as a result, a good deal of the national wealth fell into the hands of a relatively small group of so-called business oligarchs (tycoons), and the wealth gap increased dramatically.[1] It was described as "Catastroika"[2] and as one of the "most cataclysmic peacetime economic collapse of an industrial country in history".[3] A few "strategic" assets, including much of the Russian military industry, were not privatized during the 1990s. The mass privatization of the 1990s remains a highly contentious issue in Russian society today, with many Russians calling for significant revisions or even a general reversal of the reforms. Indeed, many Russians view the privatization quite critically and hold strongly negative views towards its chief architects, notably Anatoly Chubais and Yegor Gaidar.

Spontaneous privatization (1988–1991)[edit]

Between 1988 and 1991, new Soviet legislation championed by Mikhail Gorbachev effectively transferred some controlling rights over enterprises from the government to the employees and management. The legislation also enabled these enterprises to withdraw from associations on their own, which led to the process of so-called spontaneous privatization in which control over some industrial assets was acquired by their managers. However, this accounted for only several thousand enterprises, a small fraction of the Soviet industry.[citation needed]

Voucher privatization (1992–1994)[edit]

Voucher privatization in Russian Federation

Privatization took place on a much wider scale in the early 1990s, when the government of Russia deliberately set a goal to sell its assets to the Russian public. Upon the Soviet Union's collapse, the successor government of the Russian Federation was forced to manage the huge and inefficient state enterprise sector inherited from the Soviet economy. Privatization was carried out by the State Committee for State Property Management of the Russian Federation under Anatoly Chubais with the primary goal being to transform the formerly state-owned enterprises into profit-seeking businesses, which would not be dependent on government subsidies for their survival. To distribute property quickly and to win over popular support, the reformers decided to rely mostly on the mechanism of free voucher privatization, which was earlier implemented in Czechoslovakia. The Russian government believed that the open sale of state-owned assets, as opposed to the voucher program, would have likely resulted in the further concentration of ownership among the mafia and the former Soviet political and industrial elite, which they sought to avoid. Nevertheless, contrary to the government's expectations, insiders managed to acquire control over most of the assets, which remained largely dependent on government support for years to come. Thus, although several of the initial objectives had not been fully achieved by the end of the vouchers program, a great deal of assets did fall into private ownership remarkably quickly and worked to provide some basis for market competition. Voucher privatization took place between 1992-1994 and roughly 98 percent of the population participated. The vouchers, each corresponding to a share in the national wealth, were distributed equally among the population, including minors. They could be exchanged for shares in the enterprises to be privatized. Because most people were not well-informed about the nature of the program or were very poor, they were quick to sell their vouchers for money, unprepared or unwilling to invest.[citation needed] Most vouchers—and, hence, most shares—wound up being acquired by the management of the enterprises. Although Russia's initial privatization legislation attracted widespread popular support given its promise to distribute the national wealth among the general public and ordinary employees of the privatized enterprises, eventually the public felt deceived.[4]

Oil sector[edit]

Privatization of the oil sector was regulated by Presidential decree №1403 approved on November 17, 1992. Vertically integrated companies were created by joining some oil-producing enterprises and refineries into open-stock companies. Starting in 1994 many former state oil companies were privatized. This privatization has been partial because the federal government has obtained ownership positions in several companies and has also retained full control over the transport of oil onto lucrative world markets.[5]

Loans for shares (1995–1996)[edit]

In 1995, facing severe fiscal deficit and in desperate need of funds for the 1996 presidential elections, the government adopted a loans-for-share scheme proposed by banker Vladimir Potanin and endorsed by Anatoly Chubais, then a deputy prime minister, whereby some of the largest state industrial assets (including state-owned shares in Norilsk Nickel, YUKOS, LUKoil, Sibneft, Surgutneftegas, Novolipetsk Steel, Mechel) were leased (in effect privatized) through auctions for money lent by commercial banks to the government. The auctions were rigged and lacked competition, being largely controlled by favored insiders with political connections, or were used for the benefit of the commercial banks themselves.[6] As neither the loans nor the leased enterprises were returned in time, this effectively became a form of selling for a very low price.

"[T]he reforms of the 1990s were mainly the work of the advisers brought in under then president Boris Yeltsin. Fearing that the population might soon have a change of heart and turn its back on reform, Yegor Gaidar and Anatoly Chubais, the chief Russian architects of the process, decided to accelerate it, selling off state resources and enterprises at little or no charge. Not long into the process, ownership of some of Russia's most valuable resources was auctioned off by oligarch-owned banks under a scheme called "Loans for Shares." Although they were supposedly acting on behalf of the state, the bank auctioneers rigged the process-and in almost every case ended up as the successful bidders. This was how Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million, and how Boris Berezovsky got Sibneft, another oil giant, worth $3 billion, for about $100 million. [...] [T]he government was generally unable to exercise much control. Since the state was very weak, these "new Russians" paid little or no taxes on their purchases."

- Marshall Goldman, Professor of economics and associate director of Russian Studies at Harvard.[7]

"Much of the second wave of privatization that did take place—in particular, the "loans-for-shares" scheme, in which major Russian banks obtained shares in firms with strong potential as collateral for loans to the state—turned into a fraudulent shambles, which drew criticism from many"

- John Nellis, Center for Global Development[8]


A "less cynical" interpretation was proposed by Professor of political science and international studies, Russell Bova, who offered as an alternative, that Chubais may have been motivated by concerns that privatization would fail, that in the face of mid-1990s economic difficulty, the country might revert towards a Communist resurgence if progress was not maintained, and that in light of these concerns, the long term political goals of democratization and asset distribution from state hands to private ownership might have been deemed more important than possible short term gains from the asset sales: "[I]f that meant undervaluing State assets then so be it".[9]

The scheme has been perceived by many as unfair, and it is the loans-for-shares scheme that gave rise to the class of Russian business oligarchs, who have concentrated enormous assets, further increasing the wealth gap in Russia and contributing to the political instability. Furthermore, in the medium-term, this scheme significantly hurt Russian growth since the oligarchs realized that their purchases could be seen as fraudulent by future governments and thus they attempted to strip assets from the government enterprises rather than build them up.

The first decade of the 2000s[edit]

From 2004 to 2006, the government took control of formally privatized companies in certain "strategic" sectors. oil, aviation, power generation equipment, machine-building and finance. For example, the state-owned defense equipment company Rosoboronexport took control of Avtovaz, the primary producer of Russian cars. In June 2006, it took 60% control of VSMPO-Avisma, a company that accounts for two-thirds of the world’s titanium production. In 2007, United Aircraft Building Corporation, a company that is 51% government controlled, combined all of the Russian companies producing aircraft.[10]

The 2010s[edit]

In December 2010, Russian President Dmitry Medvedev had ordered regional governments to decide on privatization of non-core assets by July 2011. Arkady Dvorkovich, then a top Kremlin economic aide, said regional privatization proceeds could amount to several billion rubles in 2011, and regional authorities must prioritize the sale of utility companies, financial institutions, manufacturing and transportation assets and the media.[11]

On May 2012, after becoming prime minister, Medvedev said Russia should carry out its privatization program regardless of market volatility.[12]

After a session of the World Economic Forum in October 2012, Medvedev said "It is vital for our country to continue the course towards privatization". He stressed that had assured participants in the World Economic Forum session that "does not want to see an economy totally controlled by the state".[13]

2011-2015 privatization plan[edit]

On October 2010 the Russian government has approved a plan to privatize a wide range of state property from energy to agriculture and banking to transportation.[14]

See also[edit]

References[edit]

  1. ^ Holmstrom, Nancy; Richard Smith (February 2000). "The Necessity of Gangster Capitalism: Primitive Accumulation in Russia and China". Monthly Review (Monthly Review Foundation) 51 (09). 
  2. ^ "katastroika" definition from Double-Tongued Dictionary
  3. ^ Milne, Seumas (16 August 2001). "Catastroika has not only been a disaster for Russia". The Guardian. Retrieved 17 September 2011. 
  4. ^ Hilary Appel, "Voucher Privatisation in Russia: Structural Consequences and Mass Response in the Second Period of Reform". Europe-Asia Studies, Vol. 49, No. 8 (Dec., 1997), pp. 1433–1449.
  5. ^ Privatization with Government Control: Evidence from the Russian Oil Sector, Daniel Berkowitz and Yadviga Semikolenova
  6. ^ Privatization in Transition Economies: The Ongoing Story - ed. Ira W. Lieberman, Daniel J. Kopf, p.112
  7. ^ Putin and the Oligarchs - Marshall Goldman, November/December 2004, published for the Council for Foreign relations
  8. ^ Time to Rethink Privatization in Transition Economies? - John Nellis, pub. in the quarterly magazine of the International Monetary Fund, June 1999, Volume 36, Number 2.
  9. ^ State-Building in Russia: The Yeltsin Legacy and the Challenge of the Future p.35, ed. Gordon B. Smith, quote by Russel Bova
  10. ^ Hanson, Philip. "The Russian Economic Puzzle: Going Forwards, Backwards, or Sideways?" International Affairs. 83(5), p. 876-877.
  11. ^ "Medvedev orders regions to adopt privatization plans by July", RIA Novosti, December 7, 2010.
  12. ^ "Medvedev: Privatizations Should Be Carried Out Regardless Of Mkt Volatility", Wall Street Journal, May 21, 2012.
  13. ^ "Medvedev confirms course towards privatization of state property", ITAR-TASS, October 14, 2012
  14. ^ "Russian government approves 5-year privatization plan", RIA Novosti, 21/10/2010.

Further reading[edit]

  • Carol S. Leonard and David Pitt-Watson, "Privatization and Transition in Russia in the Early 1990s". (Oxford, UK: Routledge, 2013). ISBN 0415556082 | ISBN 978-0415556088 0.

Andrei Shleifer & Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia. (Cambridge, MA: MIT Press, 2000). ISBN 0-262-19434-1

External links[edit]