Privatization in Russia
Encyclopedia
Russian privatization was the reform consisting in privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 of state-owned industrial assets that took place in Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

 in the 1990s, during the presidency of Boris Yeltsin
Boris Yeltsin
Boris Nikolayevich Yeltsin was the first President of the Russian Federation, serving from 1991 to 1999.Originally a supporter of Mikhail Gorbachev, Yeltsin emerged under the perestroika reforms as one of Gorbachev's most powerful political opponents. On 29 May 1990 he was elected the chairman of...

, immediately after the dissolution of the Soviet Union
Dissolution of the Soviet Union
The dissolution of the Soviet Union was the disintegration of the federal political structures and central government of the Union of Soviet Socialist Republics , resulting in the independence of all fifteen republics of the Soviet Union between March 11, 1990 and December 25, 1991...

, where private ownership
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...

 of enterprises had been illegal for a long time. The privatization enabled Russia to shift from the deteriorating Soviet planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 towards market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...

, but as a result a good deal of the national wealth fell into the hands of a relatively small group of so-called business oligarch
Business oligarch
Business oligarch is a near-synonym of the term "business magnate", borrowed by the English speaking and western media from post-Soviet parlance to describe the huge, fast-acquired wealth of some businessmen of the former Soviet republics during the privatization in Russia and other post-Soviet...

s (tycoons), and the wealth gap increased dramatically. It was described as "Catastroika" and it was the "most cataclysmic peacetime economic collapse of an industrial country in history".
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
Defense industry of Russia
The Defense industry of Russia is a strategically important sector and a large employer. It is also a significant player in the global arms market...

, 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
Anatoly Chubais
Anatoly Borisovich Chubais is a Russian politician and business manager who was responsible for privatization in Russia as an influential member of Boris Yeltsin's administration. From 1998 to 2008 he was the head of the state owned electrical power monopoly RAO UES. The 2004 survey by...

, 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.

Voucher privatization (1992-1994)

The privatization took place on a much wider scale in the early 1990s, when the government of Russia
Government of Russia
The Government of the Russian Federation exercises executive power in the Russian Federation. The members of the government are the prime minister , the deputy prime ministers, and the federal ministers...

 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
Economy of the Soviet Union
The economy of the Union of Soviet Socialist Republics was based on a system of state ownership of the means of production, collective farming, industrial manufacturing and centralized administrative planning...

. 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
Voucher privatization
Voucher privatization is a privatization method where citizens are given or can inexpensively buy a book of vouchers that represent potential shares in any state-owned company...

, earlier implemented in Czechoslovakia
Czechoslovakia
Czechoslovakia or Czecho-Slovakia was a sovereign state in Central Europe which existed from October 1918, when it declared its independence from the Austro-Hungarian Empire, until 1992...

, 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
Russian Mafia
The Russian Mafia is a name applied to organized crime syndicates in Russia and Ukraine. The mafia in various countries take the name of the country, as for example the Ukrainian mafia....

 and the former Soviet political and industrial elite
Nomenklatura
The nomenklatura were a category of people within the Soviet Union and other Eastern Bloc countries who held various key administrative positions in all spheres of those countries' activity: government, industry, agriculture, education, etc., whose positions were granted only with approval by the...

, which they sought to avoid. Nevertheless, contrary to the government's expectations, insider
Insider
An insider is a member of any group of people of limited number and generally restricted access. The term is used in the context of secret, privileged, hidden or otherwise esoteric information or knowledge: an insider is a "member of the gang" and as such knows things only people in the gang...

s 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. 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.

Loans for shares (1995-)

In 1995, facing severe fiscal deficit and in desperate need of funds for the 1996 presidential elections
Russian presidential election, 1996
Presidential elections were held in Russia in 1996. Incumbent Russian President Boris Yeltsin was seeking a four-year term after officially winning the 1991 presidential election. The first round was held on 16 June 1996...

, the government adopted a loans-for-share scheme proposed by banker Vladimir Potanin
Vladimir Potanin
Vladimir Olegovich Potanin is a Russian businessman and oligarch. His partner has been for many years Mikhail Prokhorov...

 and endorsed by Anatoly Chubais
Anatoly Chubais
Anatoly Borisovich Chubais is a Russian politician and business manager who was responsible for privatization in Russia as an influential member of Boris Yeltsin's administration. From 1998 to 2008 he was the head of the state owned electrical power monopoly RAO UES. The 2004 survey by...

, then a deputy prime minister, whereby some of the largest state industrial assets (including state-owned shares in Norilsk Nickel, YUKOS
YUKOS
OJSC "Yukos Oil Company" was a petroleum company in Russia which, until 2003, was controlled by Russian oligarch Mikhail Khodorkovsky and a number of other prominent Russian businessmen. After Yukos was bankrupted, Khodorkovsky was convicted and sent to prison.Yukos headquarters was located in...

, LUKoil
LUKoil
Lukoil/LUKoil ; ) is Russia's second largest oil company and its second largest producer of oil. In 2009, the company produced 97.615 million tons of oil; ....

, Sibneft, Surgutneftegas
Surgutneftegas
Surgutneftegas is a Russian major oil and gas company. It was created in 1993 by merging several previously state-owned companies with large oil and gas reserves in Western Siberia. The company's headquarters are located in Surgut, Tyumen Oblast....

, Novolipetsk Steel
Novolipetsk Steel
Novolipetsk Steel , or NLMK, is one of the four largest steel companies in Russia with sales of more than US$11.7 billion in 2008 and 9.2 million tonnes of steel output. NLMK's share of domestic crude steel production was about 13% in 2007. It primary produces flat steel products, semi-finished...

, Mechel
Mechel
Mechel is one of Russia’s leading mining and metallurgical companies, producing coal, iron ore, nickel steel, rolled steel products, hardware, heat and electric power. Headquartered in Moscow, the company operates facilities in Russia, Romania, Lithuania, Kazakhstan, Bulgaria, and the United...

) 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. Economically, this turned out to be a stunning success, as government ultimately managed to cease subsidising the then-inefficient enterprises, and their performance significantly improved under new ownership, contributing to the Russian economic growth in the 2000s. However, 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
Russian oligarchs
Business oligarch is a near-synonym of the term "business magnate", borrowed by the English speaking and western media from Russian parlance to describe the huge, fast-acquired wealth of some businessmen of the former Soviet republics during privatization in Russia and other post-Soviet states in...

, 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.

See also

  • Economic history of the Russian Federation
    Economic history of the Russian Federation
    -Historical background:For about 60 years, the Russian economy and that of the rest of the Soviet Union operated on the basis of a centrally planned economy, with a state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy...

  • History of post-Soviet Russia
    History of post-Soviet Russia
    With the dissolution of the Soviet Union on 29 May 1991, the Russian Federation became an independent country.Russia was the largest of the fifteen republics that made up the Soviet Union, accounting for over 60% of the gross domestic product and over 50% of the Soviet population. Russians also...

  • Business oligarch
    Business oligarch
    Business oligarch is a near-synonym of the term "business magnate", borrowed by the English speaking and western media from post-Soviet parlance to describe the huge, fast-acquired wealth of some businessmen of the former Soviet republics during the privatization in Russia and other post-Soviet...


Further reading

  • Andrei Shleifer
    Andrei Shleifer
    Andrei Shleifer is a Russian American economist. From its inauguration in 1992 until it was shut down in 1997, Shleifer served as project director of the Harvard Institute for International Developments Russian aid project...

     & Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia. (Cambridge, MA: MIT Press, 2000). ISBN 0262194341
  • Andrew Barnes. "What's the Difference? Industrial Privatisation and Agricultural Land Reform in Russia, 1990-1996". Europe-Asia Studies
    Europe-Asia Studies
    Europe-Asia Studies is an academic peer-reviewed journal published 10 times a year by Routledge on behalf of the Institute of Central and East European Studies, University of Glasgow, and continuing the journal Soviet Studies , which was renamed after the dissolution of the Soviet Union...

    , 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 0316853607
  • Hilary Appel, "Voucher Privatisation in Russia: Structural Consequences and Mass Response in the Second Period of Reform". Europe-Asia Studies
    Europe-Asia Studies
    Europe-Asia Studies is an academic peer-reviewed journal published 10 times a year by Routledge on behalf of the Institute of Central and East European Studies, University of Glasgow, and continuing the journal Soviet Studies , which was renamed after the dissolution of the Soviet Union...

    , 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 0801483967
  • Maxim Boycko, Andrei Shleifer
    Andrei Shleifer
    Andrei Shleifer is a Russian American economist. From its inauguration in 1992 until it was shut down in 1997, Shleifer served as project director of the Harvard Institute for International Developments Russian aid project...

     & Robert Vishny, Privatizing Russia (Cambridge, MA – London: MIT Press, 1995). ISBN 026202389X
  • Michael McFaul & Tova Perlmutter (eds.), Privatization, Conversion, and Enterprise Reform in Russia (Boulder, CO: Westview Press, 1995). ISBN 0813333148
  • Paul L. Joskow, Richard Schmalensee, Natalia Tsukanova & Andrei Shleifer
    Andrei Shleifer
    Andrei Shleifer is a Russian American economist. From its inauguration in 1992 until it was shut down in 1997, Shleifer served as project director of the Harvard Institute for International Developments Russian aid project...

    . "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
    Europe-Asia Studies
    Europe-Asia Studies is an academic peer-reviewed journal published 10 times a year by Routledge on behalf of the Institute of Central and East European Studies, University of Glasgow, and continuing the journal Soviet Studies , which was renamed after the dissolution of the Soviet Union...

    , Vol. 46, No. 3 (1994), pp. 417–435.
  • Roman Frydman
    Roman Frydman
    Roman Frydman is an American economist at New York University and the author of more than ten books treating macroeconomic theory and privatization.Frydman's research, exemplified by his two recent books with Michael D...

    , 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

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