Privatization in Russia

Privatization in Russia
Country	Russia
Start date	1992
Key people	Anatoly Chubais, Yegor Gaidar, Boris Yeltsin
Major companies	Gazprom, Lukoil, Norilsk Nickel, Surgutneftegaz

Privatization in Russia was a transformative and controversial process that transferred state-owned assets of the Soviet Union into private hands following its dissolution. Initiated under President Boris Yeltsin and his reformist government, it aimed to rapidly create a market economy and a class of property owners. The process, executed in phases including voucher privatization and the loans-for-shares scheme, fundamentally reshaped the nation's economic structure and led to the rise of powerful oligarchs.

Background and historical context

The drive for privatization emerged from the profound economic crisis of the late Soviet Union, exemplified by policies like Perestroika under Mikhail Gorbachev. Following the dissolution of the Soviet Union in 1991, the new Russian Federation, led by President Boris Yeltsin and a reform team including Yegor Gaidar and Anatoly Chubais, faced the monumental task of transitioning from a planned economy to a capitalist system. The ideological impetus was heavily influenced by shock therapy advocated by Western advisors like Jeffrey Sachs and institutions such as the International Monetary Fund. The legal groundwork was laid by laws like the 1991 Law on the Privatization of State and Municipal Enterprises, which aimed to dismantle the legacy of the Communist Party of the Soviet Union and prevent a return to socialism.

Voucher privatization (1992-1994)

The first major phase, known as voucher or voucher privatization, began in 1992 under the direction of the State Committee for State Property Management headed by Anatoly Chubais. Every citizen was issued a privatization voucher that could be invested in investment funds like Mikhail Khodorkovsky's Menatep Bank or used in auctions for shares in enterprises. Major assets such as Uralmash and the Murmansk Shipping Company were sold off. However, the program was marked by poor corporate governance, widespread insider dealing by Soviet-era Red Directors, and hyperinflation that devalued the vouchers, leading to the concentration of assets in the hands of a few.

Loans-for-shares program (1995-1996)

The controversial loans-for-shares program was conceived in 1995 by financiers like Vladimir Potanin of Oneximbank to provide budget revenue for the Yeltsin government and secure oligarchic support for Boris Yeltsin's re-election in the 1996 Russian presidential election. Under the scheme, the state offered shares in crown-jewel natural resource companies like Norilsk Nickel, Surgutneftegaz, and Yukos as collateral for loans from a select group of commercial banks. These auctions, controlled by figures such as Mikhail Khodorkovsky, Boris Berezovsky, and Mikhail Fridman, were non-competitive, and the banks later foreclosed on the shares at a fraction of their market value, creating the core of the Russian oligarch class.

Post-2000 developments and case studies

Under President Vladimir Putin, the nature of privatization shifted towards reasserting state control over strategic sectors, often through actions against the oligarchs. The most famous case was the prosecution of Mikhail Khodorkovsky and the subsequent renationalization of his Yukos oil company, with its assets absorbed by Rosneft, led by Igor Sechin. Other major state corporations like Gazprom and Russian Railways retained dominant state ownership. Later privatizations, such as the sales of stakes in Sberbank and VTB Bank, were more orderly but often favored state-owned enterprises and loyal business figures.

Economic and social impact

The privatization process had a catastrophic short-term impact, contributing to a severe economic collapse in the 1990s, a dramatic fall in GDP, and the rise of hyperinflation. Socially, it caused immense hardship, wiping out savings and leading to a sharp decline in life expectancy. While it successfully dismantled the Soviet economic planning system, it also created extreme wealth inequality and the notorious Russian oligarchs who amassed fortunes from natural gas and nickel resources. The rise of powerful financial-industrial groups fundamentally altered the political system of Moscow and the nation.

Legal framework and criticism

The legal basis for privatization was established by the Supreme Soviet of Russia and later the State Duma, including the 1991 privatization law and subsequent decrees. The process has been widely criticized both domestically and internationally. Critics, including figures like Grigory Yavlinsky of Yabloko and economist Joseph Stiglitz, denounced it as a corrupt "catastroika" that constituted the "greatest theft in history." The Constitutional Court of the Russian Federation has heard numerous challenges regarding the legality of sales. The lack of transparency, asset stripping, and the role of the Russian mafia have left a lasting legacy of public distrust and ongoing legal disputes over property rights.

Category:Economy of Russia Category:Privatization by country Category:1990s in economic history