Privatization in Russia

• 1. Introduction

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  Privatization in Russia describes one of the most sweeping economic transformations in modern history. In a country where private ownership of enterprises had been essentially illegal throughout the Soviet era, the early 1990s brought a sudden and radical reversal. Under Boris Yeltsin, who assumed the presidency following the dissolution of the Soviet Union, roughly 45,000 state enterprises were suddenly up for grabs. The questions that follow are as much about power as they are about economics. Who actually ended up with those assets? Why did a program designed to distribute wealth among ordinary citizens produce a handful of billionaire oligarchs instead? And what does it mean that, decades later, many Russians still call for the reforms to be reversed?

• 2. Soviet Roots

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  Mikhail Gorbachev pledged to build a "mixed socialist economy" before the Soviet Union had even begun to crack. In 1987, pushing past resistance from some of his own allies, he steered a "law on state enterprise" through the Supreme Soviet of the Soviet Union. That law gave work collectives a greater voice in running their enterprises, pulling authority away from central planners.

  The following year, 1988, the Law on Cooperatives went further. It legitimized "socialist cooperatives" that functioned, in practice, as private companies. They could deal directly with foreign firms and bypass some of the strictures of central planning. That same year, private Soviet farmers gained the right to rent land from the state, buy equipment, and hire workers, a significant break from the collective farming system that had dominated for decades. The push was partly an attempt to address critical food shortages that the existing system had failed to fix.

  One side effect of this legislative shift was unplanned. The new rules allowed enterprises to withdraw from associations on their own terms, opening the door to what came to be called spontaneous privatization, where managers quietly acquired control over industrial assets. This affected only several thousand enterprises, a small fraction of Soviet industry, but it foreshadowed patterns that would define the decade to come.

  In September 1990, the Soviet parliament handed Gorbachev emergency privatization powers, including authority to convert state enterprises into joint-stock companies with shares offered on stock exchanges. A year later, in September 1991, one of the largest single privatization moves of the Soviet era took shape when the Ministry of Fuel and Energy was transformed into a joint-stock company called Rosneftgaz.

• 3. The Reformers Arrive

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  In the months before the Soviet Union formally dissolved in December 1991, Boris Yeltsin was already building his economic team. He turned to Yegor Gaidar, then a young reformist economist, and included Anatoly Chubais among the core group.

  Gaidar initially looked to Swedish social democracy as a possible model, then shifted his attention to Hungary as a template. Poland's use of shock therapy also shaped his thinking. Both Gaidar and Chubais believed that a market economy could take root in Russia despite its entirely non-capitalist economic history.

  The August 1991 coup attempt accelerated the pressure. The economic situation deteriorated sharply in its aftermath, and an acute food shortage emerged. When Yeltsin delivered a speech in October 1991, he announced that price controls would be lifted on the 1st of January, 1992. Gaidar had actually advised against naming a specific date, but Yeltsin went ahead anyway. That tension between the reformers' caution and the political pressures on Yeltsin would become a recurring theme as the privatization program unfolded.

• 4. Vouchers for the People

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  The State Committee for State Property Management, under Anatoly Chubais, rolled out a program that distributed vouchers to roughly 144 million people, giving them the opportunity to become shareholders in formerly state-owned enterprises. The goal, explicitly stated, was to transform those enterprises into profit-seeking businesses that would no longer depend on government subsidies.

  Around 40 million Russians did become shareholders. The voucher model had been used earlier in Czechoslovakia, and the Russian government chose it in part because a direct open sale of state assets seemed likely to hand everything over to the Russian mafia and the old nomenklatura. The voucher route was supposed to be more democratic.

  It did not work out that way. Roughly 98 percent of the population participated in the program, but most people were either poorly informed about how it worked or simply too poor to hold onto their vouchers. Many sold them quickly for immediate cash just to survive the economic collapse following the Soviet dissolution. The vouchers, and therefore the shares, flowed toward enterprise managers who had both the knowledge and the means to accumulate them.

  A 1995 World Bank report noted that by mid-1994, between 12,000 and 14,000 medium and large enterprises had moved into private hands. From 1992 to 1994-15,000 firms changed hands through the voucher program alone. Ownership had technically been distributed, but control had concentrated. Insiders ended up holding most of it, and those enterprises remained largely dependent on government support for years afterward.

• 5. Loans for Shares

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  By 1995, the Yeltsin government was facing a severe fiscal deficit and needed funds ahead of the 1996 presidential elections. Banker Vladimir Potanin proposed a scheme that Anatoly Chubais, by then serving as deputy prime minister, endorsed: the government would receive loans from commercial banks in exchange for leases on some of the largest state industrial assets.

  The assets involved included state-owned shares in Norilsk Nickel, Yukos, Lukoil, Sibneft, Surgutneftegas, Novolipetsk Steel, and Mechel. The auctions that followed were rigged. They lacked genuine competition and were largely controlled by insiders with political connections, or were structured to benefit the commercial banks themselves.

  Neither the loans nor the enterprises were returned when the agreements were supposed to expire. What had been framed as a temporary leasing arrangement became, in practice, a permanent transfer of vast state assets at very low prices. The wealth that flowed from this process went to a relatively small group of business oligarchs and the so-called New Russians, particularly executives in natural gas and oil. This concentration of ownership is part of what led commentators to describe the entire transition as katastroika, a portmanteau of catastrophe and perestroika, and what led one assessment to call it "the most cataclysmic peacetime economic collapse of an industrial country in history".

• 6. Why It Failed

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  The failure of privatization in the 1990s traced back to several overlapping problems. Most vouchers went to managers and employees of the companies being privatized. Managers then used their positions to acquire disproportionate control, including by pressuring employees to sell their shares cheaply and by using intimidation to block outside buyers at auctions.

  The largest businesses never entered the voucher program at all. They were auctioned separately, and at low prices, to a small number of well-connected oligarchs. Once those individuals had acquired their assets, they did not invest in rebuilding them. Feeling that their property rights were insecure inside Russia, many engaged in asset stripping, moving value out of their companies and into investments overseas.

  The oil sector illustrated a particular variant of this pattern. Presidential decree No. 1403, approved on the 17th of November, 1992, regulated the privatization of oil companies. Vertically integrated companies were formed by merging oil-producing enterprises with refineries. Starting in 1994, many former state oil companies were privatized, but the federal government retained ownership positions in several of them and kept full control over oil transport to lucrative world markets. Partial privatization in a strategically sensitive sector left the lines of control blurred.

  A few areas were never privatized at all. Much of the Russian defense industry remained in state hands throughout the 1990s, one of the limits the Yeltsin government placed on its own program.

• 7. Renationalization and Reversal

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  From 2004 to 2006, the Russian state began reclaiming territory it had given up. The government took control of formerly privatized companies in sectors it now labeled strategic: oil, aviation, power generation equipment, machine-building, and finance. The state-owned defense equipment company Rosoboronexport absorbed Avtovaz, the primary producer of Russian cars.

  In June 2006, Rosoboronexport acquired 60 percent control of VSMPO-Avisma, a company that accounts for two-thirds of the world's titanium production. In 2007, United Aircraft Building Corporation, 51 percent government controlled, consolidated all of the Russian companies producing aircraft under a single structure.

  The following decade brought official rhetoric still oriented toward privatization. In December 2010, President Dmitry Medvedev ordered regional governments to decide on privatization of non-core assets by July 2011. Arkady Dvorkovich, then a senior Kremlin economic aide, estimated that regional privatization could yield several billion rubles in 2011 alone. In October 2012, after a session of the World Economic Forum, Medvedev said it was "vital" for Russia to continue its privatization course and stressed that he did not want "an economy totally controlled by the state."

  By October 2017, the mood had shifted again. Russian Minister for Economic Development Maxim Oreshkin told Reuters that "there are almost no fiscal reasons left for privatization," pointing to an improved economy driven by rising oil prices. Then the 2020s brought something more decisive: the start of the Russian invasion of Ukraine triggered a wave of nationalization, reversing the direction of three decades of reform. At least 200 businesses have been nationalized since that invasion began.