Privatization in Russia

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Russian privatization was the reform consisting in privatization of state-owned industrial assets that took place in Russia in the 1990s, during the presidency of Boris Yeltsin, immediately after the dissolution of the Soviet Union, where private ownership of enterprises had been illegal for a long time. The privatization enabled Russia to shift from the deteriorating Soviet planned economy towards 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 it was the "most cataclysmic peacetime economic collapse of an industrial country in history".^[3] Many non-industrial assets, most notably, most of the social welfare and telecommunications, as well as strategic industrial assets, including much of the Russian military industry, were not privatized during the 1990s. The privatization of the 1990s is still a highly contentious and polarizing issue in the Russian society, stirring up strong sentiments among the population, including the widespread negative attitude towards Anatoly Chubais, one of the most instrumental figures of the reform, and even calls for its revision.

Spontaneous privatization (1988–1991)

As new Soviet legislation in 1988-1991 effectively had transferred part of property rights over enterprises from the government to the employees and management and enabled the enterprises to withdraw from associations on their own, in the process of the so-called spontaneous privatization control over some industrial assets was acquired by their managers. However, this accounted for only several thousand enterprises, a small part of the Soviet industry.^{[citation needed]}

Voucher privatization (1992–1994)

Voucher privatization in Russian Federation

The 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 out. As the Soviet Union collapsed, the government 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 goal to transform the enterprises into profit-seeking businesses, not dependent on government subsidies for their survival. To distribute property quickly and to win popular support, the reformers decided to rely mostly on the mechanism of free voucher privatization, earlier implemented in Czechoslovakia, and on the nearly free transfer of shares to employees, as it was believed that the sale of property instead of the free transfer would have almost certainly resulted in a 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 the state budget for years to come. Thus the initial objectives have not been fully achieved, although a great deal of assets became privatized remarkably quickly and provided some basis for market competition. The voucher privatization took place in 1992-1994. 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. Most people, however, were not well-informed and/or were very poor and were quick to sell the vouchers for money, unprepared and/or unwilling to invest.^{[citation needed]} Most vouchers and hence most shares ended up acquired by the management of the enterprises. Although Russia's initial privatization legislation attracted widespread popular support as it promised to distribute the national wealth among the general public and ordinary employees of the privatized enterprises, eventually the public felt deceived.^[4]

Oil sector

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)

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 through auctions for money lent by commercial banks to the government. The auctions, however, lacked competition, as they were largely controlled by favored insiders. As neither the loans nor the leased enterprises were returned in time, this effectively became a form of selling for a very low price. 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

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.^[6]

The 2010s

On 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.^[7]

On May 2012, after becoming prime minister, Medvedev said Russia should carry out its privatization program regardless of market volatility.^[8]

2011-2015 privatization plan

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.^[9]

See also

• Economic history of the Russian Federation
• Banking in Russia
• History of post-Soviet Russia
• Business oligarch

References

Further reading

• Andrei Shleifer & Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia. (Cambridge, MA: MIT Press, 2000). ISBN 0-262-19434-1
• Andrew Barnes. "What's the Difference? Industrial Privatisation and Agricultural Land Reform in Russia, 1990-1996". Europe-Asia Studies, Vol. 50, No. 5 (Jul., 1998), pp. 843–857.
• Chrystia Freeland, Sale of the Century: The Inside Story of the Second Russian Revolution (L.: Little Brown, 2000). ISBN 0-316-85360-7
• 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.
• Joseph R. Blasi, Maya Kroumova & Douglas Kruse, Kremlin Capitalism: Privatizing the Russian Economy (Ithaca, NY: ILR Press, 1997). ISBN 0-8014-8396-7
• Maxim Boycko, Andrei Shleifer & Robert Vishny, Privatizing Russia (Cambridge, MA – London: MIT Press, 1995). ISBN 0-262-02389-X
• Michael McFaul & Tova Perlmutter (eds.), Privatization, Conversion, and Enterprise Reform in Russia (Boulder, CO: Westview Press, 1995). ISBN 0-8133-3314-8
• Paul L. Joskow, Richard Schmalensee, Natalia Tsukanova & Andrei Shleifer. "Competition Policy in Russia during and after Privatization". Brookings Papers on Economic Activity. Microeconomics, Vol. 1994, (1994), pp. 301–381.
• Pekka Sutela, Insider Privatisation in Russia: Speculations on Systemic Change. Europe-Asia Studies, Vol. 46, No. 3 (1994), pp. 417–435.
• Roman Frydman, Andrzej Rapaczynski & John S. Earle, The Privatization Process in Russia, Ukraine and the Baltic States (Budapest: Central European University Press, 1993).
• Růžena Vintrová, "The general recession and the structural adaptation crisis", Eastern European Economics, Vol. 31, No. 3 (1993).
• Simon Johnson & Heidi Kroll, "Managerial Strategies for Spontaneous Privatization", Soviet Economy, Vol. 7, No. 4 (1991), pp. 281–316.

External links

• The Privatization Programs in Russia in the 1990s

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